A personal loan, as opposed to a commercial or business loan, is a loan to an individual for his or her own use. This type of loan is smaller than a mortgage and is typically used to purchase a car, renovate the home, pay for a vacation, to finance a wedding, to cover funeral costs or deal with an unexpected event.
A personal loan may also be taken out to consolidate several other loans into one – this is known as a debt consolidation loan. Small loans, overdrafts, credit card and store card deficits, and payday loans can charge high rates of interest. Consolidating them all into one loan with your bank may be much cheaper.
Personal loans also have a shorter term compared to a mortgage. Instead of paying over ten to thirty years, your monthly installment will span from one to five years.
There are several types of personal loans and many reasons for getting one.
UK’s Tesco Bank advises consumers considering a personal loan to make sure they are well informed. There are many loans out there, designed for various purposes and people in a wide range of circumstances. Understanding how they work is important if you want to get on top of your debts.
Secured and unsecured loans
There are two main types of personal loans: secured and unsecured loans.
Secured loans: the borrower will have to put up a personal asset as security (collateral) on the debt. This could be his or her home or car. If the debtor defaults (fails to keep up the payments), the debtor can seize the asset and sell it in order to recoup the money lent.
Unsecured loans: if the borrower has a high credit score and the amount is not too high, the bank may be willing to lend the money without any collateral tied to the contract. If you are young and have no credit history, or have had problems paying loans in the past and your credit score is low, you may find this type of loan difficult to get.
Before applying for a personal loan, you need to have a clear idea of how much you want to borrow, and the amount you can afford to repay each month.
According to Cambridge Dictionaries Online, a personal loan is:
“Money that you borrow from a bank or other financial organization for your personal, rather than business, use.”
Video – Types of personal loans
This video explains the difference between secured, unsecured, variable and fixed rate personal loans.