Different Types of Personal Loans

In the world of finance, a loan essentially is the lending of currency by one or more people, institutions, companies, or other associated entities to another people, companies, or other associated entities. The borrower is then legally liable to repay interest on that loan as well as to return the principal amount borrowed and to pay back the original principal amount. Usually, loans are made for specific purposes. There can be a single purpose loan that is used to undertake major expenditure like remodeling your house, opening a new business venture, going on a vacation, paying off some debts or credit card bills and so on. Such loans are also used in education as they help in paying fees, tuition fees and other charges for students attending a particular college or university.

Loans can be made for a fixed or an adjustable repayment period. Under a fixed period loan, the borrower is obligated to repay interest during the fixed period irrespective of the level of interest prevailing at the time of borrowing. Similarly, under an adjustable period loan, the borrower is liable to make repayment according to the raise in the interest rate. Borrowers who are planning to buy a car or a boat or who are in need of additional funds for their children’s education can opt for such loans.

Personal loans are considered as a popular choice amongst all those who require short term assistance. Since these loans are unsecured in nature, they carry a higher rate of interest. However, if you are careful and plan your finances beforehand, then you can manage to borrow affordable loans. In fact, if you do not repay your personal loans on time then you may end up losing the shirt off your back because the repayment amount will be extremely high. Therefore, before you borrow any loan you must do proper research and then decide whether you need a personal loan or not.

If you have a good credit record then you can easily secure a personal loan with a low rate of interest against a secured asset. However, if you are planning to pledge collateral for the loan then you can also go for unsecured loans because there is no need of pledging collateral. However, the repayment terms for unsecured loan are generally poor. Therefore, borrowers need to do a proper calculation as per their requirements and then choose a loan that suits their repayment capacity.

Another type of personal loan is an installment loan where the loan amount is repaid over a stretch of monthly installments. This type of personal loan has a high rate of interest but the repayment term remains flexible. This is because the repayment begins only when the entire installment amount is paid off. Thus, you can easily become a defaulter if you take up a huge loan amount without considering your budget. The repayment schedules of such loans are generally fixed and thus you are required to make your installment payments without any break. Moreover, since installment payments are small and do not incur a lot of interest, they provide an excellent option for debt consolidation.

Last but not the least is a revolving loan where the interest rate and the repayment period vary according to the popularity of the loan. With a revolving loan, your repayments are determined by considering a number of factors including your credit history and the available funds. Some of the loans are based on your credit history whereas some are based on market trends. For instance, a rising market and higher disposable income level ensures a steadily rising repayment term. In such a case, you can use the borrowed money to buy some valuable asset or pay off other debts to reduce your financial liabilities.