What is a personal loan? Definition and examples
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 a home, pay for a vacation, finance a wedding, 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.
A payday loan is a loan that employees take out and pay back on payday.
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.
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.
Additionally, borrowers should consider the loan’s interest rates and fees, as these can significantly affect the total cost of the loan and the monthly repayment amount.
Secured and unsecured loans
There are two main types of personal loans: secured and unsecured 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.
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.
It’s also advisable to review your credit report and score beforehand, as a higher credit score can often lead to more favorable loan terms, including lower interest rates.
Compound phrases with ‘personal loan’
With the term ‘personal loan,’ we can make many compound phrases in the English language. Let’s have a look at some of them:
Personal Loan Agreement
A document detailing a personal loan’s terms and conditions. Here’s an example of the term in context: “Before signing, Jane carefully reviewed the Personal Loan Agreement to understand the repayment schedule and interest rates.”
Personal Loan Calculator
A tool to estimate personal loan repayments and interest. As in:
“John used a Personal Loan Calculator online to determine how much he would need to pay monthly for his new loan.”
Personal Loan Application
The form or process for requesting a personal loan. For example:
“After comparing different offers, Maria decided to fill out a Personal Loan Application with her preferred bank.”
Personal Loan Officer
An employee managing and assessing personal loan processes. As in:
“Kevin scheduled a meeting with the Personal Loan Officer to discuss his eligibility and borrowing options.”
Personal Loan Refinancing
Replacing an existing personal loan with a new one, usually with better terms. For example:
“Sara considered Personal Loan Refinancing to take advantage of lower interest rates and reduce her monthly payments.”
A global concept
A personal loan is a global concept. Here is the term in some of the world’s most widely spoken languages, apart from English:
Préstamo personal (Spanish), Empréstimo pessoal (Portuguese), Privatkredit (German), Prêt personnel (French), Prestito personale (Italian), Pożyczka osobista (Polish), Личный займ (Russian), قرض شخصي (Arabic), وام شخصی (Farsi), व्यक्तिगत ऋण (Hindi), ذاتی قرض (Urdu), ব্যক্তিগত ঋণ (Bengali), 个人贷款 (Mandarin Chinese), 個人貸款 (Cantonese Chinese), 個人ローン (Japanese), 개인 대출 (Korean), Pinjaman pribadi (Indonesian), Vay cá nhân (Vietnamese), Kişisel Kredi (Turkish).
Video – What is a Personal Loan?
This video, from our sister channel on YouTube – Marketing Business Network, explains what a ‘Personal Loan’ is using simple and easy-to-understand language and examples.