Personal loan

Personal loan – also referred to as consumer loans, personal loans are a form of financing that is granted for the borrower’s personal use; personal loans can be either secured or unsecured.

If the loan is secured, the loan provider will require the amount to be guaranteed by your personal assets or by a co-signer who acts as a guarantor on your behalf. In other words, if it’s a secured loan then if you fail to make payments and default on the loan, the lending institution will be able to seize your assets or approach your guarantor and demand the outstanding balance from them.

If the loan is unsecured, it is also referred to as a signature loan. With unsecured loans, the amount being borrowed is approved based on the lending institution’s assessment of the borrower’s ability to repay.

Broadly speaking, unsecured loans are a bigger risk for the lender than secured loans. Whether it’s a secured or an unsecured loan, repayment is normally made over a specified period of time (and in specified amounts) agreed upon in advance by the borrower and the lender.

What is a personal loan used for?

The uses for personal loans are virtually limitless, but a wise and responsible borrower will have a strong reason to borrow money.

Uses for personal loans include:

  • Medical expenses
  • Purchasing a car
  • Obtaining an education
  • Buying, or repairing, a home
  • Starting or funding a small business

Is a personal loan right for me?

A personal loan is just that: personal. Once you receive a personal loan, you’re free to spend it on whatever you want, so long as you’re able to pay it back via monthly payments for a specified period of time.

But as a result, personal loan lenders often compete against other types of loans. For example, a homeowner that’s looking to refinance their property can choose between a personal loan, a home equity loan, and a home equity line of credit (HELOC).

Simply put, personal loans aren’t always the best option. We’ve compared personal loans against other common types of loans to help you determine which loan works the best for you.

Personal loans – The pros

  • You might be able to borrow more than with a credit card.
  • They usually charge a lower rate of interest when compared to a credit card on larger balances.
  • Your loan repayments will also usually be a fixed amount each month, which can make it easier to budget.
  • The interest rate you pay on a personal loan is usually fixed (but not always – check that it is fixed not variable).
  • You can choose how long you’d like to take to repay the loan. Remember the length of a loan will affect the amount you’re charged in interest.
  • You can consolidate several debts into one personal loan, potentially reducing your monthly repayment costs. But be careful, as this might mean extending the length of the loan and so paying more overall.