What Is a Personal Loan?

Written by: John Landers

A personal loan is smaller than a mortgage. Many consumers take out these smaller loans to finance a vehicle, make home improvements, pay for a wedding, take a vacation, or consolidate  debt.  A personal loan has a shorter repayment period than a home loan—usually a term of 1-5 years.

These loans provide a reasonable alternative to credit cards. However, personal loans necessitate that the borrower has a good credit score because the interest rates can approach close to 30%. If you go to a payday loan, you can pay an astronomical 300% or more.

Secured or Unsecured

Consumer can obtain two types of personal loans: 1) secured or 2) unsecured. A secured loan requires the borrower to  put up  personal  property, such as a vehicle , ring, or boat as collateral in case the person fails to make the loan payments   Depending on state laws, real estate may also be used as security for a secured loan. These loans usually have a lower interest rate compared to unsecured loans.

Unsecured loans or “signature loans” do not require collateral. The bank makes the loan based on the borrower’s meeting the credit criteria and a signature. In comparison to a secured personal loan, the interest rates are higher and the borrower will probably not be able to get as much money. The main benefit is that it does not require you to risk losing an asset if you cannot make the payments

Personal Loan Sources

Most banks and credit unions offer personal loans. Speak to a representative of the institution to find out the terms for a loan. Most banks will offer a customer, who has good credit and a long-term relationship with the lender, a signature. Nonetheless, you should always shop around to compare interest rates and fees to assure yourself of obtaining the best deal.

You can also look into obtaining personal loans from peer to peer lenders, such as Prosper.com or Lending Club .com. Borrowers can hook up with investors and obtain loans for $30,000 or more. The loan repayment period is usually about three years.

Before Applying

Pull a copy of your credit report and check your credit score. Clean up any misinformation or errors before submitting a loan application. You can receive a free credit report every year from each of the major credit bureaus. After you make corrections, recheck your credit report.

As with any financial transaction, borrowers need to do the necessary research and comparisons before consummating a personal loan transaction. Here are some the items a borrower need to consider before completing a loan application:

  • High interest rates compared to home equity loan
  • Higher transaction costs versus a home equity loan
  • Interest charges not deductible on tax return

If you have a home, it may be more advantageous to choose a home equity loan. Make sure you understand the terms of a personal loan, or any loan, before signing on the dotted line.


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What Is a Personal Loan?

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