Types of Personal Loans
With its high interest rates and seemingly endless payments, credit card debt has become overwhelming for many consumers. Many borrowers are seeking alternatives such as home equity loans. But what if that's not an option? A personal loan could be the answer.
Personal loans are small loans that may or may not require collateral. They are readily available to those with good credit, and even to many who have blemishes on their credit reports. Personal loans usually offer reasonable interest rates, and they are suitable for a variety of purposes.
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Function
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Personal loans may be used to finance necessities or luxury items. The proceeds may go toward car repairs, a new home entertainment system or a vacation. Some use personal loans to consolidate debt on loans and credit cards with higher interest. A home equity loan would offer a better interest rate, but a personal loan does not put one's home on the line and can be utilized by those who are not homeowners.
Types
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Personal loans may be secured or unsecured. Secured personal loans require collateral, and that collateral is often the item purchased with the proceeds of the loan. When the loan is obtained to finance a vacation or consolidate bills, the borrower may offer personal property or savings as collateral. Unsecured personal loans require no collateral, but borrowers must usually have a good credit rating to get them.
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Features
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Most personal loans are set up as installment loans. The borrower gets a lump sum up front, then makes monthly payments until the principal and interest are repaid. The first payment goes mostly toward interest, but with each payment the amount of principal paid increases.
Some lenders offer personal lines of credit as well. A line of credit works similar to a credit card in that the borrower may use the money as needed and make payments based on the amount of credit used.
Considerations
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When obtaining a personal loan, it is important to thoroughly examine the terms. Short-term loans such as those obtained from payday lenders often have high-interest rates and penalties. Longer-term loan agreements sometimes have unfavorable provisions as well. Banks usually offer the lowest interest rates and best terms on personal loans. Those with less than perfect credit, however, are more likely to be approved by a finance company.
Warning
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Personal loans can help us afford the things we need or get the things we want. But it's very easy to get in over your head. When considering a loan for something that is not a necessity, take a good look at your finances. Will you be able to make the payments and still have the money you need to pay bills and take care of everyday expenses? Also keep in mind that if the loan is secured, you're at risk of losing your collateral if you fail to make your payments.
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