Personal Loans and How They Work

When we find ourselves in a situation where cash is needed for large purchases, household repairs, or even debt consolidation, a personal loan may be needed. Personal loans are very useful and can become a solution. But getting a personal loan requires knowing what you are getting into and planning the steps you need to take. Without proper planning on loan management, your solution for situation where you need a fund can work against you. A mismanaged loan can turn into debt that is difficult to manage. Understanding personal loans is the first step to planning how to manage it.

Unsecured Loan

A personal loan is commonly associated as an unsecured debt. There are two types of loan which are secured and unsecured. A secured debt is a kind of loan that requires a collateral while an unsecured loan does not. A personal loan is classified as an unsecured loan. Because of the nature of a personal loan not requiring any security, it is more difficult to get approved and a strict process is implemented in granting a personal loan.

Also, the interest rates for personal loans are much higher than other types of loans which are secured. The high interest rates are means of securing the principal loan amount faster to minimize the risk of loss in case a borrower defaults in continuing to pay for the outstanding balance.

Fixed Interest and Repayment Period

A personal loan has a fixed interest rate during the fixed term of the loan. Interest rates offered by different banks and financing institutions may vary but the application of the rate will be fixed over the life of the loan. A personal loan will also have a fixed term for 12, 24, or 36 months. Longer repayment means higher interest fees paid and shorter repayment means lower interest fees paid.

It is very minimal that a personal loan may have a variable interest and variable term which makes it difficult for the borrower to pay and budget the amortizations.