Personal Loan Basics

Personal loans are handy solutions to a temporary financial crisis. The unexpected happens and when it does, there is no going back. An unexpected medical emergency, car repairs, replacement of an appliance, and braces for the children are just a few of the things that a personal loan might be needed to cover.

When an individual takes out a personal loan, it is for a small amount of money  Read More...

Personal Loan Basics

(Continued) for a short time. Typically, personal loans range from $500 to $2500. The amounts are quite a bit lower than the typical home equity loan and quite a bit larger than the typical loan between friends or family members.

Types of Personal Loans

Personal loans are available as both secured and unsecured loans. Unsecured loans do not require any collateral. Even though you don't lose any physical property if you default on an unsecured personal loan, you damage your credit history.

Secured loans require a form of collateral that the lender can repossess if the borrower defaults on the loan. In the event that you default on the loan, you lose your collateral.

Where and How Do I Get a Personal Loan?

Personal loans can be acquired from a variety of locations, including banks, credit unions, financial agencies, and online sites. All it takes to acquire a personal loan is an application.

The repayment terms are straightforward with a set due date for the loan to be repaid in full. Two-year terms are common.

Banks prefer and encourage consumers to use a credit card for their financial emergency rather than a personal loan. It sets up a continuing relationship with the bank, as well as generates more profit for them.

With a credit card loan, the consumer pays higher interest than on any type of loan, receives a suggested minimum payment, which if paid will not pay off the loan in a timely manner. A great deal more discipline is needed for credit card loans. Personal loan come with a closed end or a due date when the loan will be repaid.

Benefits

• Unsecured
• Quick
• Short term
• Set interest rate
• Less expensive rates than credit cards

Disadvantages

• Expensive rates compared to other types of loans
• One more bill to pay

Personal Loans and Bad Credit

Unfortunately, consumers with bad credit might have to do quite a bit of shopping around to acquire a personal loan. Additionally, the interest rate on a personal loan will be higher for them than for consumers with good credit.

Typically, individuals with bad credit will be required to get a secured personal loan since they are already considered a risky investment. Moreover, the consumer with bad credit will need to put up collateral that the lender believes is compensatory to the amount borrowed.

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