In simple words, if you lend money for personal use it is usually referred to as a personal loan. The lender usually is a financial institution like a bank or a micro-lender (it should be borne in mind that a loan from friend or family also qualifies as a personal loan). Personal loan can be used to pay for or buy anything you want.
Banks decide on the loan amount depending on your credit history, ability to pay and its own internal credit policies. Although remember that a personal loan is different than a credit facility. The difference being – personal loans are paid as a single lump sum to you and afterward you start repaying the principle and interest in installments. A credit line or overdraft allows you access funds up to an agreed limit.
Personal loans can be either
- Secured or
Banks (or any lending institution) need collateral for sanction of personal loans in case of a secured personal loan whereas; NO collateral is needed for loans of unsecured nature. Property, jewelry etc are used as collateral. Unsecured loans are riskier for the lender so usually they charge a higher interest rate.
Personal loans tenure is usually for less than five years. The principal amount and the banks credit policies will determine the actual repayment period. Make sure you understand the loan terms and conditions completely before signing the final loan agreement. Paying the loan over a shorter repayment period will save you a significant amount. Some pointers:
- Pay the loan off as fast as you can.
- Never borrow more than you really need.
- Always make sure that the loan repayments fit into your household budget.
- Put personal loan money in productive use rather than spending it for futile purposes or on whims.
Most people use a personal loan to combine other debts. Which means that then you will then have only one debt to repay every month. For this approach to work you need to set a realistic budget and stick to it. In most cases a person who uses a personal loan to consolidate their debts usually ends up with even more debts! You will then end up in an even worse financial situation…
If you need money in a hurry then a personal loan can be the answer to your problem. Personal loans are very easily available and very hassle free as well as most banks make it fairly simple to apply. Of course you need to submit correct paperwork like income and proof of residence etc. and agree to the bank conducting a credit check on you (if required by your bank). Even if you are blacklisted you can still get a personal loan at some institution although you may need some collateral and be forced to pay higher interest charges.