Understanding What Personal Loans Are
Personal loans are among the most commonly used financial instruments on the planet. If you're thinking about taking one out, here are 5 things you should understand.
What Makes the Loans Personal?
The thing that distinguishes a personal loan from other types of loans is that the promise to repay the debt is only backed by your full faith and credit. When someone takes out a mortgage, for example, the promise isn't just a promise. The bank can take the house as collateral if the debtor defaults.
One of the reasons people are encouraged to develop their credit is to make personal loans possible. The main reasons to pay are to have access to additional loans down the road and to get a better interest rate as your credit improves.
How Are They Paid Back?
These are installment loans. If you took out a one-year loan with a 5% APR, for example, you'd probably end up with 12 monthly payments that would account for both the principle and the interest. The principle is the portion you're borrowing, and interest is the percentage the bank takes as profit.
What Are Personal Loans Used For?
Most banks and credit unions aren't too concerned about the purpose of the loan. It's not uncommon for people to use their credit to finance home renovations, vacations, medical bills, and other large expenses.
Do You Need to Provide Information?
Generally, a financial institution just needs enough information to tie your identity to a credit report. This means you'll provide basic details such as your name, Social Security number, and address. If the bank does need additional information, it's usually just to clarify that they're looking at the right records.
Why Not Use a Credit Card?
A credit card might be the right answer for your specific problem. If the amount you need is small and fits well within your credit limit, that may be a better solution than looking at personal loans.
The biggest arguments in favor of installment loans involve what credit cards can't do. First, they may not go as high as personal loans, which banks often offer for amounts as high as $100,000.
Second, you might want to be careful about maxing out your credit card if you need it to deal with daily issues. Throwing $8,000 of borrowing on a credit card with a $10,000 limit might not leave you with a lot of overhead. Also, many people choose to pay their credit cards in full every month to take advantage of perks.
To learn more about personal loans, contact a company like Ardmore Finance.