Personal loans are multipurpose loans that allow the borrower to use funds as he/she wishes. The lender is not concerned with the purpose of the provided funds. This financial flexibility can be translated into buying a new car, financing higher education, medical expenses, home improvements or holidays. Another common use of personal loans is debt consolidation in case of existing older loans with high interest rates.
There are two forms of personal loans a borrower can undertake depending on the availability and willingness to pledge collateral. Generally speaking, secured personal loans require collateral whereas unsecured personal loans do not. Given the availability of collateral, secured personal loans are easy-to-get from most loan institutions. Additionally, secured loans are best suitable when the borrower needs a large loan amount and/or they face difficulties in receiving unsecured personal loans in the case of having bad credit history. Usually, these loans have long-term repayment periods and relatively low interest rates which lead to low monthly installments. However, loans of this type tend to take longer to get issued given that the collateral should be appraised before approval.
Unsecured personal loans are not taken against collateral and lenders have no claim on borrower’s property. They take only a few days to get issued and require only minimum effort. Applying online for such a loan can expedite the loan issuance process as well. Lenders usually check the borrower’s financial capacity to make regular payments and look for a steady source of income. In case of payment default, lenders may take legal action against the borrower. Given that lenders hold the majority of the risk implied, unsecured personal loans come at high interest rates as compared to secured personal loans and repayment periods are shorter.
Credit card debt is a form of unsecured personal loan. This fact explains the high interest burden of this type of loan. Credit cards provide a line of credit to their holders up to a preset maximum amount. Credit cards, as the name suggests, are cards on which one can get credit or borrow. Each use of the credit card increases the credit card debt. Credit card settlement takes place once a month.
Shopping around for the best offer and performing a comprehensive analysis of personal needs are very crucial points on deciding what type of personal loan one needs and where to find it. Borrowers tend to misuse the freedom attached with personal loans and sometimes borrow excessively for servicing ‘questionable’ needs.