Personal loans are unsecured loans. They are issued to an Individual either by a banking institution or non-banking financial company (NBFC) to meet the personal needs of an individual.
The personal loan provides helps to those individuals who are facing shortfall to meet their monthly expenses like
- Buying a car
- Loan for children higher educations, or
- Medical emergencies etc.
Unlike a home or a car loan, a personal loan doesn’t require any security against any asset. No need for the borrower to put up collateral like gold or property to avail it.
The lender, in case of a default, cannot auction anything you own in personal loan requirements.
The interest rates on personal loans are generally higher than those on home, car, or gold loans as the risk is greater while sanctioning them.
Types of Personal Loan
- A secured personal loan that requires security, to make a loan repayment secured.
- In other words, a secured loan requires an individual to provide collateral to ensure security to the lender.
- As security, the borrower can put
- Car documents
- House papers
- Jewelry etc. as collateral.
A lender takes security so that if shortly borrower is not in a position to make repayment of the loan then the lender can take possession of the asset given as collateral.
Therefore, secured personal loan banks enjoy the surety and an individual can enjoy the lower interest rates.
For example home mortgage, home equity loan, home equity lines of credit, and vehicle loans.
- An unsecured loan is a loan that does not require a borrower to provide any security to the moneylender at the time of taking a loan from the lender.
- In other words, the unsecured personal loan doesn’t require any collateral such as a car, house, or jewelry to raise loans.
- People who don’t have any security or collateral can raise unsecured personal loans.
- Therefore in unsecured loan If a borrower is in default, the lender has no legal recourse such as foreclosing a home loan or repossessing your vehicle for non-payment.
Fixed-rate personal loan
The interest rate charged for these loans remains the same throughout the loan term. Installment loans typically carry fixed rates while lines of credit usually have variable rates.
Variable interest loan
- A variable interest loan rate can change or vary at any time during the term.
- Personal lines of credit generally carry a variable interest rate, but interest rate doesn’t need to be variable in all personal loans it can either be fixed or variable.
- The variable loan also carries caps which limits the change in an interest rate at each adjustment period. Due to the fluctuation in the interest rate, the repayment of loans also goes up and down.
- Installments loan are loans that are made for a specific amount and are repaid in equal periodic installments over an established year.
- Installment loans can be secured or unsecured. Installment loans offer fixed interest rates and are a preferable choice for a one-time expense such as debt consolidation, paying off medical bills, or funding a home improvement project.
For example – mortgages, home equity loans, and unsecured personal loans.
- A student loan is a loan which generally raised by the students or by the guardians for the higher studies of the children.
- When a student is having a low budget but wants to do higher studies there is the easy availability of student loans.
- Fortunately, many lending institutions recognize the financial burden university students are facing therefore offering assistance in the form of a student loan to meet their personal requirements.
- This loan can help purchase a laptop, textbooks, and other such educational expenses. So you can avoid the stress of holding down a part-time job while studying.