About Personal Loans
Personal loans are generally considered loans made to an individual without a lien tying the loan to collateral. As such, personal loans generally carry a higher interest rate. There are many kinds of personal loans, and some can be rather predatory.
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Function
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A personal loan, or consumer loan, allows a person to borrow money without the need for specific collateral, though such loans can be guaranteed with collateral which generally results in a lower interest rate. Such loans allow a person to borrow money for things not generally associated with borrowing by lending institutions. Often such loans are used to purchase items which, while having intrinsic value, are not convenient for lenders to use as collateral, such as ATVs, JetSkis or certain kinds of equipment.
Time Frame
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Most personal loans are set up as equity lines and thus have a revolving payment schedule in which the borrower traditionally pays on a monthly basis. However, personal loans, particularly those used to purchase something that is used as collateral, have an amortizing loan payment which generally will not outlive the useful lifespan of the item used as collateral. In cases where a specific maximum length is set on a personal loan, the length is either very short, a payday type loan, and measured in days, or fairly long, generally 10 years or 15 years.
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Warning
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Personal loans almost always carry a much higher interest rate than other loan types. In addition, in many ways a personal loan functions much the same as a credit card does and thus, using a credit card when possible may be preferable. One type of personal loan is a "payday" loan. These loans can have very high interest rates, even exceeding 100 percent APR.
Considerations
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Consider whether there is a better or cheaper way to secure the amount of funds required. A loan from a friend or relative may be preferable. A credit card may also provide a better way to secure the necessary amount. If you own your own home, consider a home equity line of credit or home equity loan to get lower rates. If you have an investment account, some firms will allow you to borrow against your investments under the same terms as a margin loan. While this is not a super cheap rate, it is often cheaper than a comparable personal loan rate.
Types
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By their nature, personal loans are extremely varied. Generally, each lender will set its own rules and regulations for personal loans, including qualifications and rates. Banks often do not compete with each other in this market, adopting a take it or leave it approach due to the nonstandard nature of personal loans. One type of personal loan is a payday or post-dated-check loan. With this loan, a customer writes a lender a check for an amount that equals the amount of the loan plus the interest on the loan but dates it for some time in the future. For example, a loan on May 15, for $300 to be paid back on June 1, might have the customer write a $330 check with a date of June 1.
Misconceptions
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Technically, most credit cards are personal loans. Because the amount charged is a loan--the credit card pays the merchant from its own money and then collects that amount from the credit card customer--and there is no collateral, such an account meets the general definition of a personal loan. However, credit cards have rules and regulations that do not apply to other types of personal loans.
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