Category: 

What are Personal Loans?

A man getting a personal loan.
Article Details
  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 24 July 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
The average age of a NASA engineer at the time of the Apollo missions was 28, now the average age is 47.  more...

July 29 ,  1976 :  The "Son of Sam" killed for the first time, beginning a long reign of terror on New   more...

Personal loans are unsecured loans that people can use for a variety of purposes, such as paying tax bills, covering school tuition, or making car repairs. Many banks and other lenders offer such loans to people with good credit records who can demonstrate an ability to repay them. This type of loan is often touted as a useful tool for consolidating debt for people who have multiple outstanding accounts which are difficult to manage. By using a single loan to pay off debt, people can consolidate their debt into one monthly payment, and they may also achieve a lower interest rate, which is a distinct benefit. Consolidating debt also tends to increase one's credit rating.

There are two types of personal loans. A closed-end loan is a one time loan of a set amount, with a fixed rate and repayment schedule. It often has a repayment period of one to two years, depending on the amount which is borrowed, and borrowers can choose to make additional payments to pay the loan off more quickly. For one-time expenses, a closed-end loan can be very useful.

A personal line of credit operates like other lines of credit, with a set limit and a revolving balance. People can use them in a variety of ways, and repay them at their leisure. They offer a great deal of flexibility, but if people do not manage them responsibly, they can turn into a problematic debt.

Ad

Usually, personal loans are unsecured, which means that borrowers do not need to back their loans with assets such as their homes. For people who have limited assets, this can be an appealing feature, because it means that they can access money which might otherwise be out of reach. Because they are unsecured, however, the loans tend to have a higher interest rate, reflecting the increased risk to the lender.

As with any loan, it pays to shop around rather than taking a loan from the first lender who offers one. In the case of a closed-end loan, potential borrowers should ask about origination fees and the interest rates, and they should determine whether or not the interest rate is fixed, how much the monthly payments will be, and how long it will take to repay the loan. Offers of personal lines of credit should be evaluated to determine whether the interest rate is favorable, and how high the limit will be.

Ad

Discuss this Article

seag47
Post 8

I've heard payday loans referred to as “instant personal loans.” They may seem really convenient, but they do come with a big fee and a big interest rate.

I only got one of these loans once, and it was because my car had been impounded and I absolutely had to get it out before time for my next paycheck. I hated having to pay the big fee to the loan company, but at the time, it was my only option.

Some people get instant personal loans online, but I don't trust these businesses. For all I know, they could be major scams. I went to a business in my town that had been around for years.

cloudel
Post 7

Personal lines of credit sound dangerous! When compared with personal loans, they sound a lot more risky.

I know that it all depends on the personality of the recipient, but there is always temptation there with a personal line of credit. With a closed-end loan, everything is cut and dry.

I don't think that I could resist buying more than I needed if I had a personal line of credit. I don't make much money, and if I were suddenly presented with the opportunity to buy nice things, I'm not sure I could resist it!

lighth0se33
Post 6

Personal loans sound like a great idea! I have two credit cards, each with at least a 20% interest rate, and I have been having a lot of trouble paying off the balance on time each month.

My husband recently had to have extensive dental work done, and we didn't have the money for it at the time, so we put it all on the credit card. Now, we are drowning in debt, and I need a solution.

I am going to see about getting a personal loan from my bank. It would be so nice to simplify this debt and just pay the bank instead.

healthy4life
Post 5

@julies – I would imagine that this allowed you to get the money much faster than a personal loan would have. I borrowed money from my parents when I bought a car, and since my dad had the money in the bank, all he had to do was write me a check.

He didn't have to ask me a lot of questions about my credit history or my job, because he knew me. He offered the loan to me at a much lower interest rate than a bank would have.

I wrote him a check on the 14th of every month. I understand what you mean about paying your parents back being very important to you. I wanted them to know that I really appreciated the loan, and I didn't want to let them down in any way.

sunshined
Post 4

I just found out I need to have some major work done on my car. I can't afford to buy a different car right now and somehow need to find the money to get my car repaired.

Would it be better to get a personal bank loan or just put this on my credit card? I think it would be easier to charge it on my credit card, but I would probably be paying a much higher rate of interest if I did this.

I have a high enough credit limit on my card that I can charge this without getting my limits increased, but it would be pretty close to the maximum amount available.

julies
Post 3

When we bought some land, we borrowed some money from my parents and treated it as a personal cash loan. We even had a contract written up and notarized that listed the amount of payments and when they were due.

We paid interest on this loan just as we would have if we had taken out the loan from a bank. This way my parents were not losing any of their money when they loaned this to us.

My parents knew they didn't have to worry about getting their money back, but I think it was important that we had a written contract. It helped keep us accountable and gave my parents some peace of mind knowing this was all in writing.

I am thankful my parents were willing to do this for us, and we didn't have to go through the hassle of going to the bank. Sometimes when you borrow money from family, it is easy to feel like you can skip a payment here and there.

Even though we didn't borrow this money from the bank, I treated it just as seriously as any other loan we had.

LisaLou
Post 2

If you are shopping around for a loan, I would make sure and do some research and comparing of prices. The cheapest personal loans may not always be the best in the long term.

When I needed to take out a loan for some unexpected bills, I learned a lot in the process. There are often origination fees or hidden fees that you might not be aware of.

I even found out that some loans charge you a penalty if you pay it off early. This seemed crazy to me since I always try to pay a loan off sooner than expected.

When you know what you are looking for, the fine print makes a little bit more sense. Even though a low interest rate sounds attractive at first, jut make sure you really know what you are signing up for.

honeybees
Post 1

When we went through a money management class, one of the best things were learned was to consolidate our debt. This made a lot of sense to me, as we were making several monthly payments and all of them had different interest rates.

By consolidating everything into one loan, I only have to worry about one payment a month and only have one interest rate. This is easier for me to manage and I know exactly how much I need to pay each month, and how long it will take me to get it paid off.

Any time I have some extra money, I will pay more so I can get the loan paid off a little bit faster. When we consolidated we got a low rate personal loan, and even though we have the same amount of debt, I feel like it is more manageable.

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email