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What Is Personal Loan and Why People Apply for It?

What Is Personal Loan and Why People Apply for It?

Increased personal loan lenders have increased loan borrowing especially in recent times when the covid-19 pandemic has brought a lot of financial difficulties to people. Before applying for a personal loan, it is always important you have deep research about it to avoid regrets in the future.

The good news is that you no longer have to go through several books or online articles to get information since this article has all the information you need. Let’s see them.

Important Facts About Personal Loan That You Must Know:

#1 Can Either Be Secured or Unsecured.

Secured loans are always backed by collateral. This means the lender will possess the tied asset in case of default payment. If the value of the asset is less than the borrowed amount, you are still eligible to pay the remaining amount.

Unsecured personal loans on the other hand are not tied to any collateral. That means you don’t need to back any valuable assets during the application. These can be online loans no credit check instant approval Canada or a personal loan from a local bank. The details in the loan agreement will be different, but the essence remains the same.

The lender will mostly look at your credit history to determine your creditworthiness. But you have all the chances to get an unsecured loan even with bad credit. They also have higher interest rates than secured personal loans.

#2 They Have Several Uses

Personal loans can be used for so many purposes including wedding or funeral expenses, emergencies like unexpected medical bills, home, and car repairs. Jeff Rose, a certified financial planner and founder of the Good Financial Costs organization gives another major use.

He says that ”personal loans can help you pay down high-interest debts. Since a lot of debts can be hard to track, you can combine these debts into a single monthly payment. This is known as debt consolidation.”

#4 They Have a Fixed Interest Rate

Most personal loans have fixed interest rates. That means if you had agreed to pay a $5000 loan with 4% interest, this rate will remain the same until the total debt is cleared.

There are however other personal loans with variable interest which means that the rate keeps on changing. This may be an advantage if the interest reduces and a disadvantage if the interest increases.

Your credit score matters when applying for this loan. That means your loan request can be denied (but not always) if you have a poor credit score. You can still get the loan but with high-interest rates.

Interest rates are also determined by the repayment period. The short repayment period has lower interest rates than the long repayment period.

#5 There Are Several Places You Can Get the Loan

Banks are the common places where you can get personal loans. You can also get them from credit unions, online lenders, consumer finance companies, or peer-to-peer lenders. Be careful about the place you choose to borrow the loan since there are a lot of scammers out there.

You can always check with the Financial Consumer Bureau to see if the loan lender is legit.

Why Do People Apply for Personal Loans?

Since personal loans have so many uses, their applications have increased especially in recent eras. According to research done by TransUnion, the number of Americans who had borrowed unsecured personal loans had increased from 19.3 million to 20.9 million during 1 year.

But what are the top reasons for getting this loan? Let’s find out.

#1 To Fund the Emergency Bills

Emergencies are part of life. Most of these emergencies usually happen when we are financially unstable necessitating the need for a loan.

Personal loans are well suited for this purpose. They can be used to cover emergency expenses like funerals, medical bills (can be dental bills, cosmetic surgery bills, service animals bills, or even medical travel).

The fact that they have a quick response and granting of the loan makes them suited for the emergency expenses.

#2 For Debt Consolidation

Debt consolidation is a process by which multiple loans be it credit cards, equipment loans, or any other loan are combined into one monthly payment.

Imagine having a credit card, payday loan, equipment loan, and mortgage all waiting to be cleared off by you. You will definitely be confused and so stressed about the situation. To make work easier, all these loans can be combined and paid monthly. This also reduces the loan interests.

Isn’t this good news? The better news is that personal loans can work this out. They can be used to consolidate these loans making them easy to manage and cost-effective.

#3 For Home Repairs

If you are thinking of fixing a broken kitchen water pipe or painting the worn-out walls without home equity, then the personal loans are just meant for that. They can be used to make any house repairs you identified including getting the necessary appliance for the job.

If you are also moving, personal loans can also assist in the expenses incurred for long-distance movement.

#4 To Cover the Expenses for Starting a New Business

Starting a new business can be challenging. For instance, if you want to open a baking shop, you need to buy the ingredients for making the cakes, cater for electricity bills, pay for the shop rent, not to mention the delivery services.

All these expenses can be heartbreaking stopping you from starting the business. Here is the best solution. Personal loans can be used to fund these expenses enabling you to focus on business growth.

The new business can make a huge profit to repay the loan and cater to your day-to-day expenses.

#5 To Learn a New Skill

Are you thinking of learning a new skill be it art, music, photography, baking, or even sports? Personal loans are best appropriate for these instances. It can cater to both long-term and short-term education.

Long-term education can even go to 5 or more years depending on the career you choose. Short-term courses can take between 3-6 months. This also includes education trips and other ventures. All these expenses can be taken care of by a personal loan.

Just like starting a new business, learning a new skill can lead to more income used to pay back the loan and later grow your business. Just make sure the new skill is worth the loan, that is, it will help in the future.

Conclusion

The many uses and easy application process combined with quick response make the personal loans favorable. Once your loan request is granted, you are sure of getting the loan within a few hours or sometimes days. Just make sure you have an effective payment plan to avoid the consequences.

Personal loans have become common especially in recent times. It is always good to research them to have a better understanding of how they work before making any decision.

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