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What is a Personal Loan?
At some point in time, you may find yourself considering getting a personal loan. It may be because you need money for a new car, a wedding, a family vacation or simply to pay off some debts. It is of utmost importance that you get your hands on the essential information about personal loans before you decide.
The fact is, when you search for a personal loan, you may find hundreds of different loans on the market from different lenders.
That is because lenders package personal loans to address different needs of different borrowers. So, in order to optimize your loan, you have to understand how a particular personal loan product will solve your need. This guide aims to provide you with many important loan facts so you can make a better choice.
More Than Financial Contract
Technically, a loan is a financial contract involving two parties called the lender and the borrower. Under this contract, the lender will agree to give the borrower a specific amount of money with the understanding that the borrower will pay back the money over an agreed period of time. It is usually, a fixed amount every month together with a pre-determined interest and occasionally, extra charges for loan administration. The other details will vary from each lender but the loan contract will spell them out – most particularly the repayment dates and interest charges.
You may encounter many different personal loan names and products from different lenders. However, you can classify personal loans into just two main types: secured and unsecured loans. The obvious difference is whether the lender will require a security for the loan. In a secured loan, the borrower must provide an asset such as his house, as a collateral for the loan. In an unsecured loan, the lender will not ask for such a requirement as long as they have satisfactory credit and are currently employed or have a regular source of income.
Things You Should Know Before Taking a Personal Loan
Times have changed even in the way people get a personal loan. In the past, lenders will just focus on your credit scores (See how your credit score is calculated), examine your tax returns and check your employment details before they grant you a loan and if so, at what interest rate.
Today, we are seeing a breed of new lenders who are veering away from tradition in their decision-making processes. Most often, they will look at non-traditional indicators like your SAT scores and your social media accounts. They will use this information to help them decide whether to give you a loan and how much interest rate to charge your loan. Consequently, this has helped to get a loan much easier than when people used to apply for loans from credit unions and traditional banks – the two institutions that hugged the personal loan arena.
Personal Loan Basics
Personal loans can be as dynamic as their borrower’s purpose in terms of their principal amount and length of their term. Some personal loans can run for years while other loans, like payday loans, become due in just a couple of weeks after the lender releases the money. In a payday loan, if the borrower repays the entire loan during that short period, he wouldn’t have to pay interest but will most like pay an origination fee for it.
There are some forms of personal loans that begin to accrue interest immediately – such as an installment loan. The size of the loan and the interest rate of the loan will dictate the borrower’s monthly payment. In some cases, when a borrower opts for a longer term, the lender may give him a lower interest rate.
If you have trouble making computations, you can use a good loan calculator. You can check whether it will be more advantageous for you to choose a longer term with a lower rate or a shorter term but with a higher rate. Just keep in mind this piece of advice: borrow within your means and never borrow more than you can afford to pay.
Here are 9 Things You Should Know Before Taking a Personal Loan: