Personal Loans

May 7th 2016

Overview

Personal loans allow people to borrow money from credit bureaus, banks, and other agencies. After borrowing a lump sum, people must repay the amount, with interest, within a specified time frame. Repayment plans can span a time period that ranges from several months to several decades.

Personal loans can help individuals and businesses meet their short-term and long-term objectives. If you need instant access to a substantial amount of money, you may need to take a loan to make basic payments while you work to become financially stable.

You may need a personal loan to open a business. With this type of loan, an individual is personally liable for the borrowed funds, even if it is the business that defaults on payments.

How It Works

You can pay off your loan by making minimum monthly payments, or you can make payments that are higher than the minimum in order to limit accrued interest repay the lender more quickly. It is advisable for people to make payments that are higher than the monthly minimum. If you can afford to make payments, you should try to pay off your loans as soon as possible.

In general, interest rates for personal loans tend to be high. Personal loans are unsecured, which means that a borrower's credit rating determines the lending agency's decision for issuing a loan. Secured loans, on the other hand, are backed with assets. A mortgage, for example, is a type of secured loan that uses the borrower's home or property as collateral. Compared to unsecured loans, the interest rates for secured loans tend to be lower since the risk of default is lower.

Several factors contribute to a lending agency's decision to grant a loan. When evaluating applicants, a committee may review your credit score, employment record, and payment history. You might need to include a personal reference who can attest to your character. Using this information, an agency will approve or deny your application. If your application is denied, you may be eligible to reapply at a later date. If your application is approved, the lending institution will give you an interest rate. In general, people who are considered high credit risks must borrow money at a higher interest rate than people who are considered low credit risks.

If your credit score is low or if your application is denied, you can ask someone with a higher income and credit score to cosign your loan. A cosigner shares responsibility for the total amount owed. If you default on your loan, the cosigner is equally liable and responsible for making payments.

A social loan is another type of personal loan. The concept of a social loan: a borrower can obtain money from a lender at an interest rate. While the deciding factors for bank loans are based on credit scored and business objectives, social loans are more flexible. For example, a person might want to lend his or her niece money. With social loans, the borrower and lender can negotiate their own terms and interest rates. You don't even need to specify a repayment term or interest rate if you prefer to arrange another payment plan.

Social loans can be risky for lenders if the loan's repayment terms are unenforceable. Social lending agencies can help formalize this informal process by negotiating, tracking, and facilitating social loans. Companies such as Virgin Money and Prosper.com provide services to create a structured system for borrowers and lenders.

Benefits

Many situations require immediately access to a substantial amount of cash. People may have an emergency or suddenly find themselves in a situation or hardship. After obtaining money, borrowers can repay lender over a period of years. This arrangement helps to ease situations that create financial difficulties.

Personal loans offer interest rates that are more favorable than credit cards. In the long run, you will end up spending significantly more money with a line of credit than you would with a loan.

If you have assets and are eligible to apply for a secured loan, you can probably borrow money at a lower interest rate provided that your credit history is good.

Social loans provide substantial benefits to both lenders and borrowers. Lenders can earn money at interest rates that are higher than typical bank accounts, and borrowers can obtain funds at a lower rate.

Personal loans are relatively easy to obtain. Generally, you are only required to complete an application. In most situations, you and your cosigners can complete applications online or over the phone.

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