What is a personal loan?
Personal loans are fairly straightforward financial products. A personal loan is where you borrow a specific amount of money, usually from a financial institution, and then repay the debt with interest in equal payments over an agreed term.
Personal loans offer the general advantages of being cheaper on average than the closest alternative (credit cards) as well as giving the discipline of a repayment schedule.
Many personal loans allow the borrower to make extra repayments. Every dollar you repay above the required repayment shortens the life of the loan as well as the overall cost.
There are two different types of personal loans that can be taken out. They can either be secured or unsecured.
Types of personal loans: Unsecured vs secured
Secured personal loans
Use an asset to secure the loan, such as a car. This asset is then used a kind of security against the debt. The money borrowed can generally be used for any legal purpose such as debt consolidation, home renovations, school fees, paying for a holiday or buying a car – although check with the lender first! If you are unable to repay the loan, the lender may be able to sell your security item.
Unsecured personal loans
Are so called because the lender requires no security for the debt. The loan is still subject to your ability to repay it, and if you aren’t able to do so, the lender may take you to court. The interest rates on unsecured loans are higher on average than secured personal loans, which reflects the higher risk of losing money for the lender.
When applying for a personal loan, be it secured or unsecured, you should always check the following information with your lender.