Personal Loan

What is a personal loan?

Personal loan is the name given to money borrowed with the intention of paying unexpected expenses. Personal loans are usually taken by people when they want to pay for personal things such as home improvement services, vacation expenses and household appliances. Personal loans usually have a short repayment period which can range from a few months to 5 years at the most. Credit cards are also another form of personal loans as a borrower can use a certain amount that is credited to their account by their bank of which they can pay back the money in evenly spread out installments. Personal loans can either be unsecured personal loans or secured personal loans. We are now going to look at unsecured and secured personal loans.

Unsecured loan

Unsecured personal loans are the widely available personal loans. An unsecured personal loan is money that is borrowed without producing any collateral or specific assets to server as guarantees in the case of failed repayments. Unsecured personal loans generally carry a high risk for the creditor as there is no collateral involved a creditor may lose money if a borrower files for bankruptcy. Thus a creditor that provides unsecured loans mainly relies on the borrower’s promise to pay back a loan. As unsecured personal loans are associated with high risk, creditors are forced to impose high interest rates as compared to those charged on loans that are guaranteed by collateral. Unsecured personal loans usually have a short payback period and they usually don’t involve very large amounts. When a borrower gets an unsecured loan they will receive a grace period after which they can start to pay off the loan. During the payment period the balance of the loan is divided equally against the months in the payment period. If the loan is paid off early a borrower can benefit from lower interest rates. However, if a borrower fails to pay back on time penalties will be incurred thus further inflating the total amount owed.

Secured loan

A secured personal loan is money that is borrowed and is supported by collateral which can be in the form of assets or property. Collateral serves the purpose of cancelling out a debt in the verge that a borrower fails to pay back a loan or files for bankruptcy. Secured personal loans have no risk for the creditor as their money is guaranteed to come back. As a result the low risk associated with secured loans allows creditors to offer these loans at very low interest rates. Secured loans usually have longer pay back periods. People borrow secured loans to pay for big investments such as real estate or business. Due to the low risk involved secured loans often involve large amounts of money. The amount of money that a borrower can borrow depends on the value of their collateral as well as their proposed payment method. When borrowing secured loans one may be asked to justify their need for the loan unlike with unsecured loans where the reasons are personal and there is no need to justify yourself. Secured personal loans are paid back in a similar fashion as to unsecured loans and that is in the form of installments. Failure to honor monthly payments results in penalties.

Payoff terms

Payoff terms for loans involve calculations which make all monthly rates have the same value over time. Payoff terms vary from creditor to creditor and for type of loan. In payoff terms the debtor and the creditor agree on set interest rates including an annual percentage rate (APR) which is charged on all credit. The creditor and borrower agree on a set payment period upon which individual installments have set dates on which they have to be paid. Delayed payments automatically attract penalties. A borrower may choose to defer payment to another month. However, deferment of payment results in a large amount of money being paid as interest. The amount of interest charged is calculated against the total amount of money owed. Thus the more you owe the larger your interest will be. In order to avoid paying a lot of money in interest borrowers may double the amount they are required to pay in monthly installments so as to incur lower charges. Some loan payoff terms allow for the creditor and debtor to revise the loan terms at times when the borrower is facing difficulties repaying a loan. In this way a creditor may extend the payback period although this results in more interest being paid the borrower enjoys reduced monthly installment. Revision of payoff terms can facilitate better understanding between creditors and borrowers, thus reducing the risks of bankruptcy.

Personal loan application process

Personal loan application processes differ depending on the loan provider as well as the type of loan being applied for. Most unsecured personal loans can be applied for online. Some credit providers have websites that have online loan application forms which they can fill in online and there is no need to use any hard copies. After signing an agreement form both the creditor and borrower can keep a copy each. Some loan applications involve a stage where the borrower has to send specified documents via fax. The documents are then filed and kept for future reference. Loan applications for secured loans are very different. This is so because with a secured loan a property or an asset has to serve as collateral to the loan. Such agreements between a creditor and a borrower may need a mediator and that is usually in the form of a legal representative. The borrower may be asked to surrender deeds to a property or asset and these are kept by the mediator (legal representative) who will then bind all assets with the law agreement. The loan applicant for a secured loan may be asked to sign extra documents that give proof they understand that in the verge they fail to pay back the loan their property or assets may be liquidated to pay off their loan.

What is a personal loan?