What is a Personal Loan?
As the name implies, a personal loan is a loan that is intended for personal use. That could refer to almost anything from home improvements to covering educational expenses, paying for a vacation, making a major purchase, consolidating your debt – really just about anything.
A personal loan is commonly known as an “unsecured loan” because you usually do not have to put up anything for collateral. Because of this, a personal loan typically has a higher interest rate than other common loans (such as a home loan or an auto loan). This is due to the fact that the lender cannot regain their money in case of a default on the loan. Because of this, your ability to obtain a personal loan may be primarily based upon your credit score.
It should also be mentioned that some lenders do offer personal loans that are secured using collateral. If this is the case, your chances of securing a personal loan will be better if you have something of substantial value to offer as collateral.
Personal loans are best used for long-term transactions whereby you will have a number of years to pay off the loan. These types of loans differ greatly from payday loans or cash advances – which have much higher interest rates and must be repaid quickly. With a personal loan, you will have much more time to repay the debt – and making regular payments over a long period of time can also have the added benefit of increasing your credit score in the long run.