What is a personal loan?


The most common type of consumer loan, the personal loan, is defined as sum of money borrowed by an individual from a financial institution for personal use. Typically, people take out such a loan so as to cover a variety of costs, such as medical or tax bills, a family vacation, or household repairs.

Unlike secured loans, which are tied to an asset such as a house or car which is then used as collateral, personal loans are usually unsecured, meaning that the financial institution has no right to any collateral. As such, personal loans are more appealing in that they are available to those who have limited assets, allowing consumers access to money that might usually be beyond their reach.

“The most common type of consumer loan, the personal loan, is defined as sum of money borrowed by an individual from a financial institution for personal use.”

An unsecured loan is consequently more difficult to obtain than a secured loan, and will boast a much higher interest rate – they are advanced based on nothing but a consumer’s credit history and ability to pay off the loan through personal income. Yet, while financial institutions have no assets to seize should one default on an unsecured personal loan, they will typically seek recuperation by other means such as the hiring of a debt collection agency or filing of a lawsuit.

While personal loans come in a variety of different shapes and sizes tailored to the varying needs of the consumer and prospective borrower, they remain fixed in terms of payments and payment schedule. They are not dependent upon the state of the economy, fluctuating inflation or other such external factors, meaning that the consumer can easily integrate their loan repayments into their day-to-day finance management. Ultimately, loan repayments can be seen to take the form of a standard bill, to be paid off monthly along with a consumer’s other bills – cell phone, car, house, etc.

What kind of personal loan is right for me?

As with all loans, it is worth shopping around so as to find the best deal for you, though the amount one is able to borrow for a personal loan will usually range anywhere from between $500 and $50,000 – though, most banks will begin to top out at around $25,000.

Of course, the amount one is able to bother is usually reflected in a consumer’s credit rating; the better your history, the more money will be made available to you. Banks will typically provide a low cap on the amount one can borrow for a personal loan, though this may change depending on a consumer’s past relationship with a specific bank.

When shopping around, the main variable a consumer will look for in order to compare the loans provided by different lenders is the interest rate. Again, this will vary depending on the lender and the personal income/credit history of the prospective borrower. Importantly, while some unsecured personal loans come with a variable interest that changes periodically, the vast majority instead provide an interest rate that is fixed and will not alter for the life of the loan. The former may seem more appealing than the latter, since the initial rate will be typically lower than that of a fixed rate, though consumers with a variable interest rate then leave themselves at the mercy of the banks and the economy – if the interest rate rises, which it typically will, so will a consumer’s monthly payment.

Secured loans, on the other hand and as mentioned previously, will usually offer a much lower interest rate than an unsecured personal loan, based simply on the fact that the consumer is providing an asset to be used as collateral. Similarly, while the interest on a secured loan is usually tax deductible, the interest on an personal loan is not.

How long do I have to pay off a personal loan?

The period of time a consumer has to pay off a personal loan is also fixed and decided beforehand based on the reason for the loan and a number of variables such as credit history, personal income, etc. This will be commonly stated in months, ranging from 12 months to 60 months – or, 1 year to 5 years. Of course, a longer repayment period such as the one listed latterly will be more appealing to the borrower in that more time is provided to pay off the loan, yet that also means that more interest will be paid. The interest rate may also be dependent upon the repayment period in that some institutions may offer lower interest rates for lower repayment periods. There is also the risk that, upon taking out a personal loan with a long repayment period, a consumer might be penalised for paying said loan back too early.

With the advances in technology, there are now more ways than ever to both apply for and pay off a personal loan. These should also be considered in that some banks offer better deals for those who are willing to set up a new account with them and then pay off a personal loan via direct debit.

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