With many businesses forced to close during this pandemic and the financial crisis, it’s comforting to learn one can get financial help by borrowing money. When it comes to acquiring loans, personal loans are usually more affordable than other loan types.
If you are planning to start a business or need some cash for everyday expenses, here are some things you need to know about a personal loan.
What is a Personal Loan?
A personal loan is simply a loan taken out for personal expenses. The loan doesn’t have to be tied up to any assets or properties, unlike mortgages, student loans, and auto loans.
Personal loans are chiefly used to cover home renovations, pay off other debts, plan vacations, and handle medical bills. It can also be used for unexpected expenses where an emergency fund is needed.
Secured and Unsecured Personal Loans
There are two types of personal loans: secured and unsecured. Secured personal loans require you to bring in collateral for your loan.
Collateral is any physical property or a bank asset, which guarantees that the debt will be repaid. If you fail to repay, the lender will repossess the collateral to reimburse the loan.
Banks usually require physical assets like houses, cars, or even boats as collateral. It can also be cash assets in a savings account or a Certificate of Deposit. The advantage of a secured personal loan is a lower interest rate since it’s backed by collateral.
On the other hand, unsecured personal loans don’t require collateral. Lenders like Creditninja.com will look at your bank history or other financial information to determine if you qualify for this loan. Unsecured loans are commonly taken for personal loans since they aren’t tied to anything. But note that this loan type has higher interest rates because of the risk it portends for lenders.
Fees Related to Personal Loans
When getting a loan, it’s important to remember that you might be required to pay some fees, which include the following:
Establishment fee. An establishment fee is deducted from your account after the loan money is transferred. This fee covers the cost of creating your account, such as expenses for documents, files, and other paperwork needed.
Servicing fee. This fee compensates the lender for recording the loan transactions.
Withdrawal fee. This is the amount that banks charge to clients when a loan is terminated or paid before the maturity date. It compensates the bank for the interests they won’t receive due to the early closing of the loan.
Take your time to consider the terms of your loan to prevent any additional expenses.
When Should You Apply for One?
There’s no right or wrong time to apply for a personal loan. However, personal loans are suitable for some specific financial situations due to their easy access. You may have other reasons to apply for one, but here are ways you can use your personal loans:
Save yourself from high-interest loans and interest on previous loans.
Personal loans aren’t the most expensive loans out there. You can use personal loans to pay off a small amount on a current loan. It will lessen the interest and also give you more time to pay off a problematic loan.
According to Gordon Simmons Retired CEO, if you have a previous personal loan with a higher interest rate, getting a new personal loan with a lower rate could help you pay off the previous loan and save you some money.
Building a Dream House or a Project
Financing a big project or a new home could be tedious, especially in this pandemic. However, personal loans allow you to execute such projects because of their low interest rates and convenient repayment schemes.
Celebrating a Milestone
Just like building your dream house, a life event could also prove expensive for your finances. For example, weddings, anniversaries, or even a plain bat mitzvah could put a dent in your budget because of the expensive nature of these projects.
However, getting a personal loan for these events may help you celebrate a once-in-a-lifetime event or milestone without having to worry about your finances.
Whenever you choose to take a loan, be it to pay bills or accomplish your lifelong dream, make sure you fully understand the loan’s terms to avoid financial troubles. If something is unclear or unfair, do not hesitate to clarify and make some adjustments. Remember, loans are there to help you overcome financial difficulties and not to put you in more financial problems.