Some people avoid personal loans because they think they’re too complex and hard to understand. The truth is, you can learn everything you need to know about personal loans in just a few minutes, and they’re the best option for anyone who needs cash now.
By definition, a personal loan is a loan that can be designated for any number of different expenses. There are two types of personal loans available to you: secured and unsecured.
Secured personal loans use collateral, such as a house or car, to back the loan. To become eligible for unsecured personal loans, which are the most common type of loan, you do not need to put up any collateral. Generally speaking, you can apply for either type of personal loan at any bank, building agency, or other official lender.
The amount of money you can borrow will vary depending on what type of institution you obtain your loan from, as well as your personal credit rating. Typically, personal loans range between $500 and $10,000. If you’d like to borrow more, most lending agencies will require you to change to a secured personal loan that is backed with collateral.
Personal loans have fixed terms, and are almost always less than five years. These fixed terms enable borrowers to know exactly when the debt is paid off, unlike credit cards, which you could still be paying off 30 years from now if you only pay the minimum due each month.
You’ll have a set period of time to repay your personal loan, and loan periods are usually stated in months (e.g. 12, 24, 36, 48, 60.) The longer your repayment period is, the lower your monthly loan repayment will be. Your interest rate also may be tied to your repayment period, and shorter repayment periods usually result in lower interest rates. Also, keep in mind that there may be a penalty for paying your loan off early.
While credit cards will increase the interest rate on your existing balance if it becomes 60 days past due, personal loans have fixed interest rates, which means they never change. If you cannot obtain a secured loan but still want to consolidate debt, don’t panic. You can usually still obtain a personal loan to consolidate debt at a lower interest rate than most credit cards carry.