Personal loans are unsecured loans that people can use for various purposes, such as paying tax bills, school tuition, or doing car repair. Many banks and other lenders offer personal loans to people with good credit records that can prove their ability to repay them. This type of loan is often cited as a useful tool for debt consolidation, for people who have multiple claims that are difficult to handle. By using a single loan to pay off the debt, people can consolidate their debt into one monthly payment, and they can also achieve a lower interest rate, which is a clear advantage. Debt consolidation also tends to increase one’s credit rating.
There are two types of personal loans.
A closed loan is a one time loan of a fixed amount, with a fixed rate and repayment schedule. This type of loan often has a payback period of one to two years, depending on the amount borrowed, and borrowers may choose to make additional payments to pay off the loan faster. For one-off expenses, a closed loan can be very useful.
A personal line of credit operates like other credit lines, with a set limit, and a swivel balance. People can use personal credit lines in a variety of ways and repay them in their spare time. Personal credit lines offer more flexibility than personal loans, but if people don’t manage them responsibly, they can become a problematic debt.
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, the unsecured nature of a personal loan can be an attractive feature, because it means they can access money that would otherwise be out of reach. Because they are simple but personal loans tend to have a slightly higher interest rate that reflects the increased risk to the lender.
As with any loan, it pays to shop around for a personal loan, rather than taking a loan from the first lender offering one. In the case of a closed-end loan, potential borrowers should ask about loan origination fees and the interest rate, and they should determine whether the interest rate is fixed, how much the monthly payments will be, and how long it will take to repay the loan.. Personal credit line offers should be evaluated to determine if interest rates are favorable and how high that limit will be.