What is a Personal Loan?
What is a personal loan?
To sum it up, a personal loan:
· Is an agreed-upon amount of money you borrow from a bank or other financial institution
· Can be either secured or unsecured
· Must be repaid over a set period of time, usually between one and seven years
· Requires regular repayments – weekly, fortnightly or monthly
· Can have a fixed or variable interest rate
How does a personal loan work?
After choosing which lender you’d like to borrow money from, you can apply for a personal loan. When applying for a personal loan, you’ll be asked if you want to apply for a secured or unsecured loan:
· Secured loans require you to offer an asset as collateral against the loan. Sometimes secured loans offer a lower interest, as the lender will be able to sell your asset in the event you’re unable to pay off the debt.
· Unsecured loans don’t require collateral. Instead you’ll need to prove you can repay your loan and validate your credit score and your income – before your application will be approved.
Once your application is approved, your lender will make the funds available for you to draw down (withdraw the loan amount) or you lender may pay the vendor directly if purchasing an asset. Remember – you’ll only start making repayments once you draw on the loan.
What can personal loans be used for?
A personal loan can supplement your income to help you pay for large expenses. Some common expenses include:
· Medical bills
· New car
· Home renovations
What should you consider before applying for a personal loan?
Like other financial commitments, there are a number factors to consider before applying for a personal loan:
· Term of the loan: This is the period during which you must repay the loan. For many lenders, the term is usually between one and seven years.
· Interest rate: The interest rate determines how much interest you’ll pay each year for the duration of the loan. Interest is usually charged monthly and is incorporated into your repayment amount. You’ll also need to decide whether you want a fixed or variable interest rate.
· Repayment amount: This is the regular amount you’ll need to repay in order to pay off your loan, plus the interest charged, within the set time frame.
· Purchase of the loan: While it’s not always a deciding factor, your reasons behind applying for a loan should be considered. You might find that saving money with a term deposit or high interest savings account is more beneficial.
Personal loans can help bridge the gap between your savings and your savings goal. By putting in the time and research, you can find a loan that’s suitable for your situation.
Interested in applying for a loan? Compare personal loans today.