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Understanding Personal Loans

What are personal loans?

Personal loans, compared to payday loans are loans that are given to individuals when they need to raise finance. These loans are usually given by banks and other financial institutions. The term personal is generally simply used to differentiate these loans from commercial loans that are given to businesses.

What kinds of personal loans can I choose from?

In general terms there are two types of personal loan -- the secured loan and the unsecured loan. A secured loan is given to an individual who can bring something of value to the table that can be used as a collateral guarantee. Security here most often involves a property but can also be something else such as a car or other asset of high value. The collateral guarantee here is given to back up your borrowing. So, if you default on your loan obligations then your lender can use this guarantee to get their money back from you.

An unsecured loan is a loan given without security. So, you don’t need to own your own home or any other asset of value to apply for this kind of loan. In most cases, due to the lack of security, unsecured loans are given for smaller amounts than secured ones and will usually have higher interest rates attached to them.

 Which loan will suit me best?

This really is down to your personal circumstances and your preferences. If you do not have security to offer a lender (i.e. if you are a tenant) then you may have no choice but to go with an unsecured loan option. Both options have their advantages and disadvantages. For example, secured loans can:

  1. Give you the lowest interest rates as being able to offer a lender security makes you a lower risk for borrowing.
  2. Be given for higher sums because of the security that backs them.
  3. Put your home on the line if you stop making your loan repayments as you have agreed to use it as collateral against your borrowing.

On the other hand unsecured loans can:

  1. Be taken out by anybody as no security is required.
  2. Give you a quick option for smaller borrowings.
  3. Cost you more than secured loans as the interest rates given will usually be set at higher rates because of the lack of security.

You may find that you can choose between secured and unsecured finance here if you are a home owner. It is important to weigh up the pros and cons of both options before coming to a final decision. You do not HAVE to go with a secured option here.

What if I have a bad credit record?

It is still possible to take out personal loans if you have bad credit. You need to be aware that your options may be somewhat limited here however. Some mainstream lenders will not lend money to people with a bad credit history and those that do will usually charge far higher rates of interest than they would give to other applicants. Your best bet here may be a specialist loan for people in your situation.

What should I look out for when choosing a personal loan?

It is important to compare the APRs on loans before you commit to one. This Annual Percentage Rate shows you your total costs when borrowing money over a year and is a useful and simple way to compare long term personal loans. Do also make sure to read the small print before you sign up for any loan. Look for flexibility in issues such as over-payments and paying off the loan early as some lenders will charge penalty fees if you try to do that.

Remember that personal loans can be used for all kinds of reasons. Some people, for example, will use them to consolidate debts, some for a DIY project and others to buy a high value item such as a car or a holiday. Most loans given here are general products -- this means you can spend the money that you borrow as you like. Some loans, however, are given for specific aims such as some car or DIY loans. Here you are supposed to spend the money you borrow on the thing you specified in your original application.