Whether you need money to pay for an emergency, or you want to consolidate debts or are planning a wedding or you either are financing your business, a personal loan can thus offer you quick and easy access to cash.
The application process is often too straightforward, and while the lenders may ask why you want to borrow money, you’re often free to spend it however you’d like.
As with the other types of debt, personal loans are always considered as valuable financial tools. However, when they are used improperly, then they can also pose a risk to your finances. However, one can take short term personal loan also.
Two Types of Personal Loans
- Secured Personal Loan
- When you take out a secured personal loan, then you are required to offer the creditor collateral.
- Unsecured Personal Loan
- No security is required in unsecured personal loan
However unsecured personal loans don’t require any kind of collateral, although the creditor has the option to sue you and take money from your paycheck or the bank account if you aren’t making any payments.
- Both the unsecured and secured personal loans are the installment loans, which means that you receive the entire amount upfront and then make monthly payments.
- Generally, if you’re approved for the loan, then you’ll be able to choose between the different repayment periods which are available such as 24, 36, or 60 months.
- The interest rate may, however, range from below 5 percent to over 30 percent, and there’s often a minimum and maximum amount which you can thus borrow.
Fixed and Variable rate of interest
- The borrower can also choose between a fixed and a variable rate loan.
- A loan with a fixed interest will have the same interest rate as personal loans throughout the life of the loan which means that your monthly payment would never change.
- Variable-rate loans thus often start with a lower interest rate than a fixed-rate loan.
- However, variable interest rates can also be increased in the future, which can thus lead to higher monthly payments and also a greater cost to you over the lifetime of the loan.
- If you can repay the loan quickly, then a variable rate may, however, save money, but if you want a definitive budget for the future, then a fixed-rate is the way to go.
How Personal Loan is useful?
Unlike an auto loan, a student loan, or a mortgage. However, a mortgage can increase the credit score for a personal loan always allows you to borrow money, and also use it however you want.
Broadly speaking, there are thus four reasons which you might want to apply for a personal loan: to consolidate the debts, to save the money, to pay for want, or either to pay for a need.
To Save Money By Paying Off a Higher-Interest Debt
- The borrower may able to take out a personal loan and then he can use the money to pay off higher-interest debt, such as a credit card debt.
- This could, however, save you money in the interest payments and then you’ll know as to when the debt will be paid off, which can be hard to predict with revolving credit accounts.
To Consolidate Debts
- A personal loan can also be used to pay off several other loans.
- Debts consolidating makes it easier to manage your bills leads to lower monthly payments, and it might save you money if you’re consolidating high-interest debts.
- A personal loan, however, isn’t the only way to consolidate your debts. The borrower may want to compare this option to using a balance transfer credit card which has a 0-percent-interest offer.
- One option may be better than the other. Depending on the type and the amount of debt, the fees which he’ll pay on a loan or the card.
To Pay for a Need
- A personal loan may also be a good option if the borrower needs money for an investment or an emergency.
- Defining the wants and needs can be difficult. But if the borrower is honest with himself likely be able to recognize the difference.
- However, it generally makes more financial sense to save for a “want”. Beforehand than to borrow money and then pay off the loan with interest.
Using a loan to pay for the needs may be a good option. It could be less costly than any alternative forms of payment such as
- Credit card, or
- A medical payment plan
Unless the borrower has a large emergency fund, he may lean slightly towards unsecured loans rather than putting his property as collateral.
Who can provide the Personal Loan?
- The borrower can get secured and also unsecured personal loans from
- Credit unions
- Financial Institution, and
- Online lenders.
- The loan’s terms credit requirements and the amount which he can borrow however varies from one lender to the next.
- Depending on the circumstances and needs, the borrower may look for a loan from an online lender. Online lenders specialized in unsecured personal loans for people who have poor credit.
- A local credit union also might offer the borrower the best rates on a secured personal loan. By using a savings account or Certificate of Deposit (CD) as collateral.
- The borrower can often get an approximation of the interest rate. The repayment periods which each lender would offer you before agreeing to borrow the money.
The borrower may, however, be able to use a personal loan to weather a financial setback, to strategically pay off a debt, or to make a large investment.
However, the borrower may want to reconsider borrowing money to pay for a want. When the borrower does to determine that taking out a personal loan makes sense. He must compare the differences between secured and unsecured loans based on his needs and credit.