There are many forms that credit can take, from mortgages, automobile loans, credit cards, purchase financing, and, of course, personal loans. All different credit lines are made to serve a different purpose and help in a different situation. Some loans are better used to buy a house, while other loans exist to help break up more considerable expenses to make them more manageable and only need to be paid in monthly increments instead of all at once.
Having credit is an essential and powerful financial tool and an incredibly demanding responsibility for the individual. This responsibility is why it is crucial for many individuals hoping to take out a loan, seek out professional advice to ensure that they understand the advantages and disadvantages of taking out this type of loan.
What Is a Personal Loan
A personal loan is used for a variety of less-specific purposes. Instead of only being able to finance a house or a car, a personal loan can help you pay for education expenses, medical expenses, or big household items like furnaces when you don’t have the funds to cover these expenses all at once.
What makes it so different from a credit card is that you pay in fixed-amount installments instead of debt with your credit card. This repayment process makes the personal loan a bit different from other forms of credit.
What to Know Before
You want to understand some standard loan terms before you decide whether or not you need or should take out a personal loan.
- The principal, in regards to a loan, is how much you borrow. Necessarily, it’s the amount of money you apply for, and when the lender is calculating the interest, it’ll be based on the principle you owe. Through the repayment of your loan, the number being decreased is the principal.
- The interest is the amount that the lender will “charge” you for the use of their money, and you will be repaying the interest over time. When you are repaying the principal loan, you are paying into your loan as well, and it is usually calculated as a percentage.
- APR stands for “annual percentage rate,” which is essentially the combination of both your interest rate and any lenders fee so that you can get a better understanding of how much it will cost to take the loan. When you try to figure out which personal loans are more affordable for you, you should compare APR.
- The term of your loan is the number of months you have to repay your loan. This term is provided by the lender, usually along with the interest rate while discussing the loan.
- Unsecured Loans
- An unsecured loan doesn’t require putting collateral up for them, under which most personal loans fall. For example, with home loans, the actual property you’re buying becomes the collateral for the lender. Unlike that, personal loans are backed by the excellent credit of the borrower or the cosigner.