Most people at some point in their life are looking to borrow money. Of the wide variety of ways to secure some form of finance most people will look at a personal loan. A personal loan is used to describe general purpose finance secured for person use rather than a business. However it doesn’t describe a home loan or mortgage which is taken out for the purchase of a home.

Personal loans can be taken out for a wide variety of purposes and generally the loan provider won’t even be concerned with what you intend to use the loan for. They’re just concerned that you have the ability to repay the loan within the set term. Specialist loans are also available, such as auto and home improvement loans which are anticipated to be used for the particular purpose.

Loans work on the principal that you agree the terms of you loan such as the interest rate and borrowing period and from this the monthly repayment amount will be calculated.

Apart from this fact the majority of personal loans work in much the same way. You apply for your loan, get your money and then spend it as you intended. You will then make a regular payment (usually on a monthly basis) to your lender to repay the money you borrowed for the period of time in your loans agreement. This payment will be made up of a sum of money that goes to pay off the original sum you borrowed plus a sum that goes towards paying off the interest you’ll be charged. So, at the end of your loan term you’ll have repaid your original borrowings and the interest attached to your particular loan.

There are generally two types of personal loan:

  • Unsecured Loan These loans don’t require any security from the lender however you can expect to pay a higher interest rate on your repayments. You may also be limited on the amount you are able to borrow from the lender.
  • Secured Loan This type of loan allows you to borrow more and usually at a lower interest rate however the loan is secured against something you own of value – usually your home.  These loans are cheaper the lender will usually be willing to lend a larger amount. This is because should you default and be unable to repay the loan, the lender has your home as security to recover the money owed.

If you don’t own a property then you will normally be limited to an unsecured loan. However if you do own your own home you’ll be offered the choice of either a secured or unsecured loan. The choice is yours as to whether you are happy to risk putting your property up as security to secure a improved arrangement. Many people are prepared to do this to get a decent repayment interest rate and to borrow the full amount required. But as stated the choice is down to you.

It’s wise to spend some time calculating how much you can comfortable repay, especially considering interest rates are usually variable and can rise, so take this into account when deciding.

If you’re considering taking out a personal loan its worth shopping around for the best deal. There are literally thousands of loan providers on the web as well as high street banks or it may be worth trying one of the many price comparison websites to find a better deal.

Monday, July 18th, 2011 at 2:07 pm
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