Personal Loans 101 - Each one has a relatively specific purpose
There are many types of loan, and each one has a relatively specific purpose. Some loans are just for school, some are just for businesses, and some are for buying a house.
Sometimes, you just need extra cash to pay for things that you need but may just not have the cash on hand to pay for. Even though you may have credit cards at your disposal, there are some benefits that personal loans can provide above those of credit cards. Let’s discuss personal loans so you can understand what they are and when it might be right to consider taking one out.
What Is a Personal Loan?
Personal loans are funds that you can borrow to use for general purposes. In other words, you can borrow money to use how you want.
The amount you can take out for a personal loan will certainly be lower than a mortgage, though some can be up to $100,000.
How Do Personal Loans Work?
When you take out a personal loan, the money is generally deposited directly into your bank account either the same day or the next day. Depending on your bank and your credit score, the signup procedure can be extremely brief. Your credit score typically carries the most weight when a bank considers your application, but they are also concerned with the amount, how long you plan to pay it back, and which type of loan you take out.
Personal loans come in many varieties and, by virtue of being general purpose, provide borrowers with plenty of customization to allow the needs to be met without under- or over-providing funds. The amounts, as mentioned earlier, can be between $1,000 and $100,000, and the payback period can be up to ten years.
Types of Personal Loans
There are two primary types of personal loan: secured and unsecured.
- Secured Personal Loan: when you take out a secured personal loan, there is a defined asset or set of assets, known as collateral, that are guaranteed in case you default on the loan. Mortgages and auto loans are both secured loans – if you default on either of these loans, the bank is able to foreclose on your house for a mortgage or repossess your car for an auto loan.
- Unsecured Personal Loan: An unsecured loan means you don’t have to put up collateral in order to qualify for the loan. This usually means your loan amount will be lower. If you default on an unsecured personal loan, the result could be a big drop in your credit score or even lawsuits
Personal Loans vs Credit Cards
When considering large purchases, borrowers are usually comparing credit cards with personal loans. To figure out which choice is best, it really depends on your needs and how long you plan to pay it back. If you have a credit card that you can use and you will be able to pay back the amount in less than a year, the credit card might be the best option.
Also, the interest rates on a personal loan will increase the longer you need on the repayment time. A 7 year repayment plan could require an interest rate nearly 3% higher than a 5 year repayment plan.
When Would a Personal Loan Make Sense?
One of the most common purposes for a personal loan is the consolidate a large amount of debt spread around several different places. If you have four or five different student loans averaging 6-7%, but they are all around $2,000, it might make sense for your to take out a personal loan if you can get a $10,000 loan for less than 6%.
Another popular use for a personal loan is a wedding, which is difficult to put on a credit card.
At Payday LV Personal loans are simply a way for people to access cash at reasonable interest rates. Most institutions will provide you with the funds relatively quickly if not the same day, and the sign-up process can be painless. A personal loan can be especially beneficial for people trying to consolidate debt, but there are several cases where personal loans provide benefits above other options.