Personal Loans

by Nancy

Personal Loans, everyone has heard of them, and many people have considered taking out a personal loan, but few people fully understand what a personal loan actually is.  A personal loan is not a loan from a friend or family member. 

Far from it, a personal loan is a type of loan offered by online lenders, banks, and credit unions.  These loans are usually extended to borrowers with steady and reliable credit, although this requirement varies based upon the financial institution offering the loan. Having a strong credit score is usually a critical requirement because most personal loans are unsecured. An unsecured loan is one that the borrower does not offer collateral to ensure the loan.  You do not put down valuable assets in exchange for the loan of money.

Because personal loans are often unsecured, this makes them an attractive offer for those who don’t have much cash on hand. Personal loans are usually lump sum installments, given to you all at once.  Repaying the loan can be done all at once, or in monthly installments.  However, because the loan is unsecured, the interest rate on the loan is often rather high.

Don’t worry too much about the interest rates, as personal loans typically come with fixed interest rates.  This means you won’t have to worry about fluctuating rates spiraling out of control. There are some personal loans that have variable-rate loans.  Variable-rate loans generally start with lower rates early in the life of the loan, but the rates can grow and fluctuate based upon the market conditions.  Fixed rate loans are typically a safer bet.

Loan Repayment

Some notes on personal loan fees and repayment:  Your loan may have fees associated with it.  You need to read the fine print of your loans and look for fees such as “origination” or “prepayment” fees.  Origination fees are fees for processing your loan. Prepayment fees are fees instituted if you wipe out your loan early, paying off the remaining balance and interest.  These fees can be a pain as they punish you for being on top of your finances and paying off your loan early.  Don’t worry, not all lenders have prepayment fees.

Every personal loan will have a different repayment plan, with widely varying terms.  As a general rule, shorter-term loans have larger monthly payments but result in less interest paid to the lender overall.

Choosing a Loan

Why would you want to take out a personal loan?  Well firstly, you can borrow more than you might think.  Personal loans can be used for quick cash, or for major purchases.  Personal loans up to $50,000 USD, while not the norm, are not uncommon.   Personal loans also have a wide variety of uses.  They can be used for financial emergencies (the most common of which are unexpected medical bills, or repair bills) or for raising capital for a new business venture.  You can even use a personal loan as debt consolidation.  Using a personal loan for debt consolidation is not always the smartest idea, but with the right rates it can help your finances considerably.

Personal loans are a solid option to get you out of a dire financial situation.  But they are not the perfect solution to every issue.  With higher interest rates than collateralized by an asset.  You can find competitive rates that are right for you if you do a little bit of research and searching.