What is a personal loan? It is a loan that depends on your creditworthiness and is usually paid back in fixed installments. For a secured loan, as in the case of a car loan or mortgage, the lender has the option of repossessing the asset in question if you are unable to make timely payments. In contrast, personal loans or unsecured loans operate a little differently. These loans are mostly taken out to pay for a catastrophic expense, a home improvement project or to fund a vacation or wedding. This means that the lender will not have anything to repossess. Therefore, they may charge a higher interest rate and some other loan fee.
There are different names given to such loans such as personal loans, signature loans, unsecured personal loans, installment loans and debt consolidation loans. Regardless of the name, these loans share very similar traits, which are:
- Interest rates depend on your credit history and scores
Lenders will consider your debt levels and your income for assessing your ability to repay the loan and your credit history. Those who have great credit scores and a very solid and reliable source of income will be charged a considerably lesser rate as opposed to those with a spotty credit history and not a very impressive income bracket.
- Collateral is not a required
Unless you are applying for a secured loan, there is no need for you to put up any collateral when you decide to take out a personal loan. In the situation where you are unable to may your loan repayments, your lender can report you to the credit bureau, which hurts your credit scores, and they can also hire debt collection agencies to get their money back or even sue you. However, they don’t have any legal right to seize any of your asset, whether it is car or property.
- No strings attached
Typically, there are no restrictions as to how the money you get from a personal loan can be spent. You are given complete control over how you spend it. Also, since the interest rate generally depends on your credit scores and history, most lenders will charge the same rate and not worry about how you intend to use the finance. But, there are also exceptions as some lenders are known to charge a higher rate in some instances like when a personal loan is taken out for the purpose of debt consolidation.
Personal loans can be immensely useful in touch and unexpected situations because they provide you with some breathing room when you are running short on cash. These days, it has become even easier to get a loan thanks to different online platforms such as Peer Form where borrowers and lenders can come together and find a suitable option for their respective needs. The process is relatively quick and convenient and people can also find lots of flexible options. As long as research is done and caution is exercised, there is little or no risk at all.