What are they?
The lending and borrowing business has evolved into need-specific debt instruments available for various categories of expenditure e.g. car loans, student loans, mortgages etc. Personal loans has emerged as a distinct category that covers relatively less expensive ventures like family trips, renovating your home, planning your wedding or auto repairs. Personal loans are always:
- Multi-purpose small loans – lowest minimum amount available compared to other categories
- Short-term – span between one to five years
- Unsecured – do not require collateral
- Fixed rate – the amount you have to pay back per installment is pre-determined so it is easier to budget
- Easier to transact – their application form and internal processing is comparatively hassle-free
Who can apply?
Personal loans are available to all working adults with a good credit history. Before submitting your application you should be aware of your credit score and asset portfolio. Since personal loans are taken out without pledging any collateral, the lender has to safeguard their interests by charging comparatively higher markup rates than other debt instruments. However, a strong credit history and steady income stream allows you to negotiate a better deal for yourself. If you do not know your score, sign up for a credit monitoring service and cancel in the grace period once you have received the initial, charge-free result.
Why apply for them?
A huge benefit of such a loan is that it allows debt settlement. You can merge all your various credit streams into a singular payment and if you make your payments responsibly, this creates a new line in your credit report and helps you boost your credit worthiness as you pay down your loan.
Compared to other short-term lending schemes like bank overdrafts, payday loans and pawnshops, personal loans are much more secure. Especially if your credit score is not as favourable as you were expecting, a high markup personal loan is still a safer bet than no-credit-check offers which seem attractive at first but can brew a financial storm for you and cause all your assets to be repossessed.
Where can you find them?
Personal loans are available at different institutions like:
- Banks (commercial)
- Peer-to-peer lenders (for profit enterprises e.g. Prosper and Lending Club)
- Payday lenders (commercial)
- Credit unions (not for profit)
- Credit building groups (not for profit)
Depending on where you go, your chances of qualifying, markup rates and terms & regulations vary accordingly. At commercial institutions the rates are higher but easier for you to qualify. However, if you really need to sort out your financial situation, unions and credit building groups are local bodies that have a price cap on the rates they are allowed to charge and can rescue you from your credit quandaries.