A personal loan is one way of generating funds that you need for a project, emergency or purchasing something of value. Personal loans are being offered by banks but are now being offered by licensed lenders as well. It is the most flexible type of loan since the borrower can use the proceeds without any restriction on where to spend it on.
But it is also important that we watch out for personal loans as they can lead us into debt that may be difficult to manage. It is important to inform ourselves of how a personal loan works and know what things we should watch out for. Here are a few things you need to consider when getting a personal loan.
- Use personal loans for a specific goal.
When getting a personal loan, it is important that we have a specific use for the proceeds or a specific goal that getting a loan should achieve. Identifying a goal for your loan allows you to maximize what you need to borrow and how much you should borrow. Remember that borrowing money from a lender creates cost through interest payments. Identifying your loan would help you maximize your funding while minimizing the cost.
- Interest rates of personal loans can either be variable or fixed.
Personal loans have different means of computing the interest payment. It can be computed through a fixed rate where the rate used will be applied throughout the loan period. This is more advantageous for loans with long payment periods. For shorter periods, having a variable rate applied to the personal loan is much more convenient.
- Personal loans can either be secured or unsecured.
Most personal loans that are being offered by banks and lenders are unsecured but there are a few banks and lenders that require a collateral. Personal loans are often unsecured and offer a higher interest rate compared to secured personal loans. The reason for this is for the lender or bank to recover the principal at a faster time frame to minimize risk of recovery. Secured loans have lower interest rate since the lender puts a lien over the secured asset to be used to recover the principal in case of borrower’s default.