Basic Information about Personal Loans

A personal loan is a type of loan taken out by individual for his private consumption. Lenders of personal loans include banks, investment brokers, or private lending companies. If you wish to apply for a personal loan, you can visit the office of lending institutions in your hometown or city, or you can access their websites to lodge your application online.

Maximum Amount and Purpose

The maximum amount of personal loan granted by most lenders is €15,000 on the average. The maximum amount differs per borrower depending on the loan packages made available by lenders, the borrower's income, and his credit score. Personal loans are granted for various purposes like paying for a dream vacation or cruise, vehicle repairs, tuition's and other educational expenses, medical and dental bills, home improvement or repairs, legal bills, and debt consolidation.

Personal Loans vs. Revolving Lines of Credit

People often confuse personal loans with revolving lines of credit. The difference between these two credit products rests mainly on their modes of release. Proceeds of a personal loan are disbursed once and as a lump-sum amount. In contrast, a borrower may draw against his line of credit either for the full amount of the approved limit or portions thereof whenever funds are needed.

Secured and Unsecured Personal Loans

Personal loans can be further classified as either secured or unsecured. Secured personal loans are backed by collateral, which the lender can foreclose in case of defaults on repayment. Collateral usually accepted by lending institutions can be a motor vehicle, real estate property or other valuable assets. Unsecured loans, on the other hand, are granted without the need for collateral and the lender does not hold onto any form of guarantee of repayment. Because of the higher risks involved, interest rates on unsecured loans are generally higher than secured loans.

Personal Loans Repayment Terms

Repayment terms of personal loans vary from one year to five years depending on the lender and the amount of the loan. You should fully understand the terms of the loan prior to signing for it so you will not tie up yourself unnecessarily. In general, monthly payments are lower for loans with longer terms although in the end, you would end up paying more because of the interest charges. Therefore, it is best to limit your borrowings to the amount you actually need and try to pay it down at the earliest possible time. Also, see to it that you can easily afford the minimum monthly payments over the loan term to avoid the possibility of you defaulting on your obligation.

Personal Loans for Consolidating Debt

Many people apply for personal loans for debt consolidation purposes. When used properly, this can be an effective strategy in personal finance to bring down interest costs and reduce monthly cash outlays into a single payment. However, there are many cases wherein the borrower, after getting a personal loan to consolidate his debts, eventually incurs additional debts again only in a matter of months. This only compounds his problems because now he will have to make more monthly payments. Such a borrower failed to develop the necessary discipline in money management and has issues on spending and debt handling. It is best for this type of individuals to take up courses on how to better manage their debts so they can get their money affairs in order. There are a number of non-profit organizations that offer credit counseling for free across the country.

Getting Started

Personal loans can help you get a quick hold of the funding you need. The requirements are few and the whole process is relatively simple. You will need to submit proofs of income, employment and residence. Once approved, the lender will issue you a check representing the proceeds of your loan. There are special loan packages available for people with poor credit scores but the interest rate is generally higher and some lenders may require the presentation of collateral.