What is Personal loan?also know its different types

Loan & Insurance

Personal loans are money that you can borrow for various purposes

A personal loan can be used to consolidate your debt, pay off home renovations or plan a wedding. Online lenders, credit unions, and banks can offer personal loans. You must repay the money borrowed over time, usually with interest. Personal loans may be subject to fees from some lenders.

KEY TAKEAWAYS

  • Personal loans can be use to covers any personal expenses.
  • Personal loans can be obtained through credit unions, banks, or online lenders.
  • You can either get a personal loan secured by collateral, which means you have to provide collateral in order to borrow the money. Or, you can get a loan unsecured with no collateral.
  • Personal loans have a wide range of interest rates, fees, and repayment terms.

Understanding a Personal Loan

You can borrow money to pay personal expenses, and then repay the funds over time. A personal loan is a form of installment credit that allows for a lump sum to be obtained. You might take out a personal loan to pay 1

  • Moving expenses
  • Consolidate your debt
  • Medical bills
  • Wedding costs
  • Renovations and repairs to your home
  • Funeral costs
  • Holiday costs
  • Unexpected expenses
These loans are not like other installment loans student loans car loans and mortgage loans. They are used to pay for specific expenses.
Personal loan lenders may restrict your options for using a personal loan. You may not be eligible for a personal loan to cover college tuition fees or other expenses.

Personal loans are also different from personal lines of credit. This is not a one-off lump sum; it’s more like a credit card. Your credit limit is a line of credit that you can use to spend money on. As you do this, your credit availability will decrease. The best way to free up credit is to make a payment towards your credit line 3

A personal loan typically has a fixed repayment date. A personal loan has a fixed end date. However, a personal line of credit may be open to you indefinitely, as long as your account is in good standing with your lender.

Different types of personal loans

Personal loans can be secured or unsecured. Secured personal loans are those that require collateral to be secured. A personal loan secured with collateral may be secured with cash assets such as a savings account, certificate de deposit (CD), or a physical asset such as your vehicle or boat. 5

A personal loan that is unsecured does not require collateral. Qualified borrowers can get both secured and unsecured personal loans from banks, credit unions, or online lenders. Because there is no collateral to collect, banks consider the latter riskier than the former. This can lead to higher interest rates for personal loans. 2

How a personal loan works

To obtain a personal loan, you must apply to a lender. This can be an online lender, credit union, or bank.

In general, you would first fill out an application. It is then reviewed by the lender who will decide whether or not to approve it. You will be provided with the terms of your loan, which you can accept/reject. The next step is to sign the loan paperwork.

Once that is done, the lender will finance the loan and pay you the proceeds. These may be paid to you via a direct bank deposit to your bank account, or by check depending on the lender. Once the loan has been funded, you are free to use the money however you like. The loan agreement will stipulate that you must repay the loan.

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