What is a Personal Loan?
A personal loan is money you borrow from a
lender for your own private use. The lending institution can be a bank,
investment broker, or private lending company. You can apply for such a
loan in your home town or on the internet. Personal loans can be used
for a variety of needs including a vacation, vehicle repairs, education,
medical expenses, home repairs or remodeling, legal bills, and debt
consolidation.
The average personal loan maximum is
$15,000. The amount you are eligible for will depend on the lending
institutions guidelines for such loans, your income, and your overall
credit rating. A personal loan is often confused with a line of credit.
The major difference between the two is that a personal loan is a lump
sum amount of money issued to you by the lender. A line of credit is
similar, but you have access to funds up to your credit line that you
can access all at once or just what you need, when you need it.
Personal loans can be either secured or
unsecured. Secured loans mean you will offer the lender some type of
collateral that they can claim in the event you don't repay the loan.
This can be a vehicle, land, or other asset you own. Unsecured personal
loans mean there is no collateral. The interest rates for unsecured
loans are higher because there is a greater risk of non-payment.
The terms of a personal loan are
generally one to five years. The terms of your loan will depend on the
lender and the amount of money you borrow. It is important that you
understand the loan terms prior to accepting the funds. While a longer
loan term will result in lower payments, you will end up paying more for
the loan over the life of it due to the amount of interest. Keeping that
in mind, only borrow the amount you need for your specific purpose and
pay it back as quickly as you can. Make sure the set monthly payment is
something within your reach on a regular basis so you are not likely to
default on the loan.
The most common use of a personal loan
is to consolidate other debts. This is a great way to have one monthly
payment and reduce your monthly expenses. However, this scenario only
works if you are willing to set a budget and life within the boundaries
of it. Too often, a person who gets a personal loan to consolidate their
debt racks up huge debt again quickly. Then they not only have that debt
to pay again, but now they have a personal loan payment to meet each
month as well. It is wise to enroll in a debt management course if you
feel you may be at risk to continue the cycle of accumulating more debt.
These can be taken for free at many non-profit credit counseling centers
around the Nation.
Personal loans are a great way to
access the money you need quickly. The application process is simple.
You will generally need to verify employment, income, and residence. The
lender will pull a credit check. You will likely still qualify for a
personal loan if you have bad credit or no established credit. However,
be prepared to pay a higher interest rate and have some type of
collateral to offer.
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