It is quite common for a person to run into a situation where he needs more money than he has or can arrange for. A credit card is a quick solution, but is not a viable option in a number of situations, and this is where loans come in. Of late, personal loans have become one of the most attractive options offered by banks and other financial institutions. While they seem similar to most traditional loans, there are, in fact, some striking differences which you must keep in mind while choosing a loan to meet your needs.
The “Personal” in Personal Loans
Typically, classic loans would require the borrower to put up some sort of security or collateral such as their vehicle, house or jewelry to receive the loan. This is a backup for the lender which they can seize if the borrower defaults on the payments, and the process is called a “secured” loan. Secured loans have low rates of interest but endanger your livelihood and possessions in case you are unable to keep up with payments. Personal loans are diametrically opposite in this regard because they are unsecured. No collateral is required, and while the interest rate is higher, it is based on your creditworthiness.
The institutions offering the loan tend to look at a number of things ranging from credit reports and scores to income records to check how much you will be allowed to borrow and what the interest rate should be. Once the loan has been approved, the funds given to you can be used for whatever purpose you want to, unlike the standard targeted loans like auto and home loans which need you to spend the granted money in a particular way.
Benefits of Personal Loans
Personal loans allow much faster access to the money because they are not bogged down by extensive paperwork requirements ranging from documentation which you must produce to forms you have got to sign in person. Most personal loans involve a brief application and a rather quick turnaround time. There are a number of services which also promise disbursement of funds within the very next business day after approval and signature. Even if this isn’t the case with your provider, the standard process will usually get you your money within two weeks.
You don’t always have to borrow from banks. There are peer-to-peer lending mechanisms in place in most areas where you can create a listing to attract willing investors. A small closing fee is usually charged by the lending service before disbursal, but other than that, the process is pretty cut-and-dried. Personal online loans are also provided for enhanced convenience. Also, they are fixed-interest loans. Hence, the rates do not change at any time in the loan window. This means your last payment would be exactly the same as the first and the only duty you have would be to keep up with the regular payments.
Possible Downsides to Personal Loans
Personal loans usually entail fairly high interest rates. Furthermore, borrowers who don’t have a very good credit scene could be refused the loan altogether, or have to pay very steep interest rates. This isn’t the fault of the lender, because, without any collateral, the only things they have to base their decision upon is income information and credit history.
There are some personal loan providers who may not have the borrowers’ best interests at heart. They could charge a variety of hidden fees, so it is important that you not only pick a trustworthy bank but also read the fine print or get a professional advisor to go through it before signing up. One of the most common fees here is a prepayment fee, which is tacked on by some providers if you choose to pay off your loan early, thus depriving them of the interest they would have gained in the remainder of the term.
Personal loans are a pretty great option if you need access to a large sum of money at very short notice. You will, however, have to do a good deal of research and legwork to ensure that you are getting the best deal possible and are not being taken for a ride by a malicious provider. As long as you are able to keep up with the regular payments, you should be just fine.
Author Bio: Thomas Meltzer is a finance guru and blogger. He has worked in the finance sector for over two decades and has now taken to running his own consultancy firm and also blogging about a number of topics ranging from debt and bankruptcy to personal online loans, auto loans and the like.