A personal loan is just what its name implies: an amount you borrow for personal reasons. These reasons could include anything from buying a car, fixing up a home, making a major purchase, paying for a vacation, or consolidating existing debt. Almost any reason is good enough, especially since most banks aren’t overly concerned with how you spend the funds as long as you repay it. However, you do need to have a clear estimate of the amount of money you are going to need before you apply. In most cases, personal loans are made for amounts between $2,000 and $35,000, although some financial institutions may offer loans for as little as $500.
There are a number of personal loan types available also: secured, unsecured, and line of credit. Keep in mind that the licensed moneylender you choose, the amount you need, and you own financial situation may affect which of these options you will have.
Here’s a brief explanation of each personal loan type:
- Secured – A secured personal loan requires you to have collateral. Your collateral could be something along the lines of your home, automobile, or other large ticket items. You will usually pay less in interest because the bank knows it has nothing to lose if you don’t make your monthly payments. However, failure to repay the loan may mean you lose whatever you put up as collateral.
- Unsecured – An unsecured personal loan does not require collateral, but you will usually pay more on interest. Additionally, some banks may charge you an annual service fee on an unsecured loan.
- Line of Credit – Basically this type of loan works similar to a credit card. Your lender approves a specific amount of credit which you can withdraw from on an as needed basis. For example, if your lender approved you for $15,000 for home improvements, you may only needed $3,000 to buy new carpeting, so you could take out just that amount instead of juggling a larger lump sum of money. Also, as long as you continue paying back the amount you have withdrawn, you can keep taking out the cash when needed. So if you used that $3,000 on carpeting and paid back $1,000, you would be able to use a full $13,000 on future expenses. However, the full amount of the loan must be paid back by the date specified by the lender.
While all of these personal loan types may work best in different situations, the most common is still the unsecured variety. One of the benefits of an unsecured loan is that it can be processed more quickly than most loans. The reason is simply that no information other than your completed application and credit report are needed for a decision. Most of the time, you’ll receive an answer in less than 3 business days and your funds become immediately available if you are approved.
Of course, not everyone will get approved. Banks and other lenders are especially cautious when it comes to unsecured personal loans. But if you have a reasonably good credit history, you won’t find getting the funds you need to be too difficult. However, you may be charged a higher interest rate if your lender feels you are even a slight risk, but the same is usually true for other types of loans and even credit cards.