What Are Personal Loans?

A personal loan is a type of an unsecured loan that helps in meeting a person’s current financial needs. Under this type of loan, no security or collateral is required while availing it. It gives the flexibility of using funds based on the convenience and need that one has. They serve as a solution for cases where cash is needed instantly. They can, therefore, be used for a medical emergency, covering educational expenses, traveling, wedding and home renovation or for the payment of an old bill under which its interest is accruing.

However, before getting the personal loan, one’s credit score will be used by the lenders to help in determining whether the person is eligible to have the loan and at what interest rate. The rates of interest on personal loans can be higher based on the credit history of the person than secured loans. Therefore personal loans may only be considered for expenses intended to be paid off quickly. Unlike credit cards, personal loans are not revolving loans and have payment term that is fixed and do not have a fluctuating interest rate. They are a type of installment loans which have a fixed repayment term of usually two to five years and in most cases carry a fixed interest rate. Under personal loan, a lump sum amount is to be received up front, and then the money is to be paid back together with interest in regular installments monthly. Before taking the loan, one is required to look for a fixed-rate agreement. Though most of this type of loan has a fixed term and interest rate, there can be exceptions to some. It will, therefore, be prudent to read the fine print.

Possible risks involved with a personal loan.

The requirement for a personal loan is that its payment should be in a fixed amount of time. It is therefore in contradiction with a credit card where it can be paid off over an undetermined amount of time. It, therefore, means that debts are to be paid faster under personal loan which may also bring some problems if the loan is not paid within the specified loan term. Since the loan is unsecured by any property, in the case of any default, you can end up being sued. Additionally, early payment of the loan may result in extra fees being charged. Some agreements under personal loan include penalties of prepayment if the loan is paid off before a certain date. Scammers also exist who use false advertising to lure people into a fake loan agreement. In conclusion, it is important to practice good credit habits to ensure that your credit score is the best which increases the eligibility of the loan and an increase in chances of getting the loan at lower rates of interest.

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