Jun 13 2010
A Personal Loan Primer
Personal loans are different than a loan for your house or your car. A personal loan means that you are borrowing cash for your private, personal use. Just about any lending institution will do a personal loan. A new development in recent years is the ability to apply for a personal loan over the internet, so you have many more choices than just local lenders.
Typically, individuals use these personal loans for a variety of needs which may include a vacation, repairs to a vehicle, expenses of education, sudden medical expenses, home repairs or remodeling. These loans can also be used for debt consolidation, especially if the personal loan can be secured at a lower interest rate than the current debts.
The maximum loan amount for most people is usually around $15,000. How large this maximum is depends on the lender’s personal loan guidelines, what your monthly pay is, and your credit score. Don’t confuse personal loans with a line of credit. If you get a line of credit you are approved to withdraw funds up to the maximum approved amount, but you don’t have to start by withdrawing anything. With a personal loan, on the other hand, you are issued a check for the entire approved amount right away.
Personal loans fall into two categories: secured or unsecured. Secured personal loans require you to provide the lender with some kind of collateral that they can claim if you default on the loan. Items commonly used as collateral include automobiles, real estate, boats or any other asset that has significant value. Most often, personal loans are unsecured so the lender cannot repossess any of your assets should you default. As you may expect, since the lender assumes more risk with an unsecured personal loan, the interest rates on these loans are substantially more than they are for secured loans.
One to five years is the typical length of a personal loan, with a fixed monthly payment sufficient to pay off the entire balance. Before applying for a personal loan, you need to realize that the longer the term of the loan is, the greater the amount you will be paying overall, because the interest amount is larger. Knowing this, you should try not to borrow any more than you absolutely need and you should also keep the term as short as you can. This will make the monthly payment larger, so you also need to make sure it still fits within your monthly budget.
Often personal loans are used to consolidate other debts into a single monthly payment. This can be a good move, especially if the new monthly payment is significantly less than the sum of the previous payments. A personal loan can also be of help to people who have realized that just paying the minimum on their credit card debt will keep them in debt to the banks forever. In this case, even though the required monthly payment is higher, being required to pay a monthly amount that will pay the debt off will eventually get these people out of credit card debt.
The sad truth is, however, that many people do not learn their lesson on credit card debt. As soon as the personal loan pays off their credit card balance, they keep spending beyond their means and end up with more credit card debt in addition to their personal loan. So while personal loans can be a great help in getting rid of credit card debt, you have to be disciplined enough not to create more debt. The lesson is that you should never apply for a debt consolidation loan until you have learned to not spend more than you make.
Applying for a personal loan could not be any easier. You just provide your employment, earnings, and home address information and authorize a credit check. Once the lender has checked your credit, you should quickly know if you are approved. Even if you have limited or bad credit history, do not be afraid to apply for a personal loan. You should still be able to qualify, but the term may be shorter and the interest rate a little higher. Once you have secured your personal loan, make a promise to yourself that you will always make the payments on time or even ahead of time. Paying off a loan like this will boost your credit score and provide you with a lender you can turn to if you need emergency cash in the future.
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