What is a Personal Loan?

What is a personal loan

In a car or home loan, your debt is backed by collateral - your car or home. However, in a Personal Loan, your debt is not backed by anything, which is why it is also be called an unsecured debt. Another name for loans with no backing is the signature loan. Loans that come with backing are known assecured loan.

Thus, for personal loans, the lender cannot seize any assets if you default. However, you aren't off the hook that easily, as your credit score will take a hit.

Because these loans aren't backed by anything, they usually come with a higher interest rate to offset the additional risk incurred by the lender. However, this may not be the case if you have good credit. If you have execellent score you might just qualify for a personal loan that charges zero percent interest for a year. Oftentimes, these types of loans come as credit cards.

Where can I get a Personal Loan?

The bank can give you a deal for a personal loan, but you may want to check with your local credit union. Since credit unions are not for profit, they can give you a lower interest rate than banks.

Additionally, there are some websites where you can lend or borrow to and from your peers. The Lending Club is an example.

What should I do before applying for a loan?

When asking about loans, the lender will be checking your credit score by pulling a hard inquiry, which may lower your credit score by a few points. If you need to check with multiple lenders, be sure to do so all in a short period of time, as that will save your credit score from dropping too drastically.

Note that the lender has the right to pull a report, even for loans that have no minimum credit score requirement!

You'll also want to check for any hidden or additional fees. Even if you get a low interest rate on the borrowed amount, there may be anorigination fee, which you pay upfront for any loan. This cost goes to processing the loan, and may be almost 5% of the borrowed amount.

When debt is financed, you probably end up paying a lot more than the total loan amount. Make sure you check the Total Amount Repayable (TAR), which can tell you exactly how much you're paying overall.


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