What is a Personal Loan?
There are many different types of loans out there. You know an auto loan is used to purchase a car and a mortgage is used to fund the purchase of a house, but the purpose of a personal loan may be a bit unclear.
What is a personal loan?
A personal loan allows you to borrow a set amount and has a set schedule for the loan to be paid back with interest. Personal loans can be used for many different things such as medical expenses, vacations, weddings, large home expenses like appliances, college tuition and even debt consolidation.
How does a personal loan differ from a credit card?
With personal loans, you borrow a set amount and must pay back that amount plus interest over time. Unlike credit cards, you can’t keep adding charges while paying on the debt on a personal loan. For some, a personal loan may help keep your expenses and budget in check since you won’t be able to add more expenses to the loan.
Most personal loans also offer a lower interest rate than credit cards. If you’re planning to make a large purchase, you could save money in interest with a personal loan. A personal loan is also a good option if you’re looking to consolidate multiple high-interest credit cards into one lower monthly payment.
Secured vs. Unsecured Loans
What’s the difference between a secured loan and an unsecured loan? A secured loan is when the borrower has something of value that’s offered as collateral in case they can’t pay back the loan. If you don’t repay a secured loan, the lender can collect your collateral in lieu of payments.
With an unsecured loan, there is no collateral as part of the loan agreement. The lender will use other tools to collect the payment if you don’t pay back your loan.
Is a personal loan right for you?
Before you apply for a personal loan, take a look at your finances and credit score. You want to be sure that you can make the payments each month and that it won’t put a strain on your budget. It’s always a good idea to check your credit report before taking on another form of credit.
If you’re looking to make a big purchase, a personal loan could be the right solution for you. With lower interest rates than credit cards and a definitive timeline to pay off your debt, a personal loan offers an alternative to racking up more credit card debt.