Personal loans have become a popular choice among borrowers when it comes to acquiring funds for their various needs. Since there is not a specific reason for taking out a personal loan, it can be used in multiple ways by the borrowers. Those individuals who rely on their credit cards often have to face two major drawbacks which include:
1. Variable rate of interest charged
2. Tenure of paying off the balance in the case borrower decides to make minimum payment
A personal loan can be used by people to have funds required for enjoying their holiday vacation, financing their education, buying a vehicle or house or consolidating their credit card, a debt, etc. A personal loan allows a borrower to apply for a specific sum of money as a loan and uses the funds to meet his or her purpose. The time frame or the reimbursement period and the interest rate of the loan are specified at the time of application of the loan by the lending institution and does not change.
In most of the cases, personal loans are unsecured. However there are various types of secured debts also available for borrowers who can apply for these loans according to their needs and their reimbursement capabilities. In the case of unsecured loans, the financial institutions do not require collateral when it comes to the approval of the loans. However, the financial institutions do check the borrowers' credit reports.
The credit rating of the borrowers has a direct influence on the approval decision of the financial institutions. In most the cases, the credit rating also affects the rate of interest charged against the loans. Some of the other factors that affect the interest rate on personal loans may include the use of a checking or savings account with the lender. Personal loans borrowers have the satisfaction of paying premiums against a fixed rate which helps in keeping the household budgets on a monthly basis stable.
One example of the unsecured personal loan that requires neither collateral nor credit rating checks, is the pay day loan. These loans have a high rate of interest since the risks to the lender are high even though the loans are usually reimbursed by the borrowers within two weeks. In case where borrowers default, they fall into the debt trap and end up paying three times the amount of the principal borrowed as a penalty fee.
Secured personal loans, on the other hand, pose lesser risks for lenders, and thus have a lower rate of interest. Also, in most cases, these types of loans are backed by assets which the borrowers lose against foreclosure in case they default. The assets, like houses or cars, are often repossessed by the lending institutions in these cases.
There are many advantages associated with personal debts, some of which include:
1. Absence of a middle man when availing funds as the borrowers deal directly with the financial institutions
2. The ever availability of the brick and mortar varieties along with online financial institutions that extend these types of loans
3. In most cases, the payment period of the short term personal debt is up to a maximum of sixty months
4. It is cheaper than a mortgage
5. It is cheaper than credit cards
6. Borrowers can make use of these personal loans for versatile needs ranging from education to entertainment
7. Fixed monthly payment
8. Other benefits
Despite the many advantages that personal debts offer, it is empirical for borrowers to know what they are getting into. This is the reason it is recommended that they read through the documents and terms and conditions carefully.