Personal Loan Definition
17 AUGUST 2023
Personal loans are a type of loan that can be used for a variety of reasons, whether you need home renovations or want to plan a dream wedding. Read further to learn more about personal loans and how they can benefit you.
What is a personal loan?
A loan is money borrowed from a lender that must be paid back with interest in monthly installments over a certain period. Lenders such as banks, credit unions, or online lenders offer loans such as personal loans to borrowers based on a multitude of factors. Your credit score, credit history, debt-to-income ratio, and cash flow are all taken into account to determine whether you are financially capable to take out a loan. A personal loan is used to fund personal expenses such as; debt consolidation, medical bills, holiday costs, or other unexpected expenses not covered by health insurance.
How to calculate a personal loan?
It is important to determine the loan details that you would qualify for if you find yourself needing a personal loan. Find out if your cash flow and income can handle the responsibility of monthly repayments.
There are many personal loan calculators online that will help you determine how much your instalments will be so that you’ll be able to budget ahead of time. Remember that most lenders also charge other fees that can be applied. Compare different loan offers to find one that is best suited to your needs by comparing the APR (annual percentage rate) which is the overall cost of repaying the loan.
What are the types of personal loans?
Personal loans can be secured or unsecured. A secured personal loan is taken out against collateral as a form of your assets such as your car or home. These are often issued if your creditworthiness is not enough to ensure that you will pay back the loan, thus representing more risk for the lender. Secured loans are most likely to have higher interest rates as well.
Unsecured personal loans do not need any collateral. Maintaining a higher credit score will mean that you are responsible with your debt and repay on time, meaning less risk for the lender. These types of loans often have lower interest and are more flexible in terms of loan details.
Personal loan terms
Before you apply for a personal loan, make sure that you understand loan terms, so that you can make an informed decision. Visit Personal Loan Terminology for a full list of terms.
- Loan agreement: This details the agreed-upon terms and conditions of the loan and its repayment.
- Loan term: The period within which you need to pay back the loan, ranging from 12 to 60 months.
- Loan Protection Insurance: Or Customer Protection Insurance covers your loan if you are unable to make payments due to sudden death or injury.
- Fees: These are applicable fees such as initiation and service fees. Initiation fees are once-off and service fees are debited monthly to cover administration costs.
Taking out a loan is a serious financial decision to make and impacts your future. Increase your financial literacy knowledge so that you can determine the best solution and method to reach your financial dreams responsibly.