There’s a strong probability that at some point in your life you’ll need to borrow money. You’ll try your parents, family and friends but their pockets might be just as empty as yours.
So, you’ll have to journey into the land of the federal government, banks, credit unions, and finance companies.
But first, the question must be answered.
What is a Personal Loan?
A personal loan is a debt taken on by individual consumers. Any debt. It includes mortgages, car loans, credit cards, payday loans and any other debt you personally take on. The personal loan system allows us to have what we want when it’s not totally paid for. It’s why banks and other financial institutions exist.
At the heart of the personal loan transaction lies a promise. A promise that you, as the debtor, will repay the money you borrowed to your creditor.
Personal Loan Types- Secured
Loan instruments exist for anything you want. They could be secured or unsecured. That’s what differentiates them. Let’s talk about secured first.
Home equity loans use a percent of the built up equity (the difference between what you owe and what the home is worth) to secure the loan. However, you can use this money for many different purposes. You might be financing college, making home improvements or consolidating your debt.
Let’s say you have 10K in your 401K. After a certain amount of time, you can borrow half of it. The remaining half covers it and when you pay the loan back, you’re really paying back yourself.
Personal Loan Types- Unsecured
Unsecured loans are just that. You, as the debtor, borrow money. The creditor takes it on faith that you’ll pay it back. If you don’t, other than extreme harassment and ruining your credit score so you can’t borrow any more, there’s nothing that can be done.
Here are some examples of unsecured personal loans.
- From 1997 to 2007 American credit card balances increased 75%
- At the end of 2007, there was 972 billion in outstanding revolving debt in the United States
- The median balance for those carrying a balance is about $2200
Interest rates vary greatly from loan to loan but in general, unsecured loans carry higher interest rates and greater penalties for late payments. In fact, often, secured home equity loans are taken out to pay off higher interest personal or credit card loans. That way the debtor payments decrease and they can deduct the home equity loan from their personal income taxes.
There are two major ways personal loans get repaid:
It’s all about cash flow. You may not be able to afford that furniture, vacation, home or car if you had to pay in full at the time of consumption. However, if you could pay the money back in installments it might be a doable proposition. That’s how the majority of personal loans get paid back. In equal installments over time.
Interest is the price you pay for that convenience.
Five Things to Consider When Getting a Personal Loan
More information on Personal Loans
In addition to Credit.com mentioned above, here are two other government sources for information on personal loans.
To begin the process for student loans, check out the Free Application For Student Aid (FAFSA) at http://www.fafsa.ed.gov/
For information on home loans from the federal government go to http://www.usa.gov/shopping/realestate/mortgages/mortgages.shtml