Do you need money for wedding expenses, to clear up other debts, to pay medical bills, for travel expenses, funeral costs, or unexpected expenses? There are several classifications of loans, but we will discuss personal loans today.
What is a Personal Loan?
It refers to funds borrowed for your own purposes. This loan, like any other kind of loan, can be offered by banks or most financial institutions. Usually, it is repaid with additional money as interest depending on the agreed period. It is classified as an installment loan that allows borrowers to pay back gradually.
Unlike other installment debts, like car loans, mortgages, and student loans, which are limited to specific purposes, personal loans are taken for a wide range of purposes. While this type of loan is different from business loans also known as forbrukslån til bedrift in Norwegian, people have been known to utilize the so-called personal loans for business purposes.
Most persons often mistake a personal credit line for personal debts. The basic difference is that the first one is operated like credit cards. Your credit line reduces as you make expenses from it. You can replace it by making payments towards the credit line. On the other hand, personal loans usually have a fixed repayment date which terminates the end of the agreement until the borrower requests new funds. A credit line remains open until you decide to close it.
Types of Personal Loans
The types of personal loans are:
Credit Builder
Before approving your request for funds, most lenders want to see how responsible you are money-wise. This can be done when you pay your debts on time. Most persons use this type of fund to prove that they won’t default.
Once the credit is approved, it is kept in a separate saving account for a period until you have paid the complete debt. The fund will be given back to you along with dividends after the completion of payment. This kind of loan is a perfect method of boosting credit scores.
The loans are usually as small as $300 and last for over 5 to 22 months. Compared to others, these are the easiest to get approved as the lender doesn’t stand much risk in lending you the funds.
Debt Consolidation
This category lets you carry over old multiple loans into one that has a new payment term. Some reasons why people might want to take this kind of loan include extending or reducing the debt period and reducing how much you pay monthly for debts.
Some lenders pay the loan directly to your choice account so that you can settle the debts yourself, while other lenders would prefer to settle your debts directly. You are allowed to borrow as low as $2000 and as much as $45000.
Holiday Loans
During this period, a lot of money is required to spend on outings, vacations, hotel bills, and sometimes airline tickets. You might desire to have enough joyful time with your family and would require enough funds to do so. To cover such costs, you can take a holiday loan.
These loans are specifically for covering holiday costs which include purchasing gifts and costs of decoration, especially during festive seasons. This is a great option especially if you do not intend to spend your savings during this period. Most persons can pay up these loans before the end of their loan period.
Loan for Home Improvement
Your house is one of your biggest assets and you should prevent it from depreciation by doing regular maintenance. Home improvements may be very expensive depending on how big or small your house is and the quality of material you may want to use. Due to this, most homeowners get loans for renovations and maintenances.
Most home improvement loans are unsecured. This means that you do not need to deposit collateral before you are given. As a result, you can easily get them. On the downside, they usually come with high-interest charges. You could go for a secured home equity option if you want a reduced interest charge.
Medical Loan
No one is ever prepared to fall sick. You might not have enough cash to fund the medical expenses. Therefore, you can take a loan to help you cover your bills. However, you should be careful when taking medical loans as there might be hidden charges. You should take out time to do your research properly before signing up for such loans. Click here to learn more about this type of facility.
Vacation Loans
It is wiser that you save up for your vacations before the time. However, in cases where you might not want to dip into your savings for reasons best known to you. If also, you are supposed to attend a very important event on brief notice, you can choose a vacation loan. You should understand that they can be very expensive to pay back due to the high-interest charges attached to them.
Wedding Loan
Wedding plans could take a lot of time trying to cut and make up for budgets especially when you are planning with low funds. Research shows that an average wedding in the US costs about $19000 as of 2020. For some, the thought of this amount could be disturbing. However, you can take a loan to help you finance your wedding preparations.
You should be careful not to borrow less than you need as this kind of loan is fixed and can’t be increased. Borrowing less than you need would require you to apply for a new loan on a new term.
Family Loan
Most persons may not want to borrow money from the bank or financial institutions. This is due to the effect on their credit score as well as the high-interest rates imposed on them. Borrowing money from a family member or close friends might be the best option especially if you want a little amount and can pay it up easily and quickly.
This is one of the easiest and fastest means to get a loan. However, you must apply caution when involving family members in monetary issues as you do not want to ruin your relationships with them because of money.
Advantages and Disadvantages
There are several advantages as well as disadvantages of taking a personal loan.
Advantages
Flexibility and Broad Range of Usage
While other kinds of loans have specific purposes and are limited to those intentions, personal loans are used for various purposes. People who need to fund some projects and do not need to be restricted to how they use the funds can take them. Car loans, for example, are only restricted to car dealings.
Reduced Interest Charges and High Limits for Borrowers
Compared to other borrowing options, personal loans usually carry low-interest charges. If your credit score is excellent, you may qualify for an interest rate of 5 to 9%. You could also be granted access to higher amounts compared to the limits on your credit cards.
They Are Mostly Unsecured
This simply means that you do not need to deposit an amount or your property as collateral before you can get approval. However, if you are unable to pay back the money borrowed under the terms of your lender, you would be punished by the law.
Disadvantages
High-Interest Rates in Most Cases
Personal debts can accrue high interest rates especially when your credit score is poor. You might end up paying higher interest charges than credit cards.
Higher Charges for Defaulters
Charges and penalties are usually on the high side and can increase borrowing costs. Some lenders may charge some fees if you pay back borrowed funds before the term expires. It is important to crosscheck all charges before you request funds.
Conclusion
Personal loans may be taken when you have a broad range of expenses. You could get one when undertaking an emergency trip, a vacation, pay hospital bills, or consolidate debts. However, it is pertinent to check through the lender’s terms and conditions so you can know whether there are hidden