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What is a Personal Loan?
When you take out a loan, you borrow an amount of money for a certain period of time and pay interest on the outstanding principal balance. Generally, they are unsecured, which means there is no collateral. They are often acquired to make a specific purchase or to consolidate other high interest loans into one monthly payment. Most are obtained from a bank or a credit union. A line of credit is a common alternative to an installment loan. Upon approval, the lender establishes a maximum amount that you may borrow (your credit limit). You may borrow what you need, as you need it, in any amount, as long as your outstanding principal balance does not exceed your limit. As you pay down the balance, you can borrow more, up to your limit. Most credit lines are unsecured, but some are collateralized with property, such as your home. Typically, there is no fixed repayment period as long as you make the minimum monthly payments.
Interest rates are typically lower than credit card rates. If your line of credit is with a financial institution, you likely access it with a check, a debit card, or a withdrawal slip.
Qualifications, Rates, and Repayment
Depending upon the amount you wish to borrow, anyone with a steady income can apply for and obtain a personal loan or line of credit. You must demonstrate to the lender that you have the ability to make regular monthly payments on the debt. Most banking institutions will set you up with a line of credit attached to your checking account, often called an overdraft line of credit. This allows you to write checks for more than your checking account balance, although any amount in excess of your checking account balance must be repaid with interest. Most banking institutions also offer loans to their established customers. They are easier to qualify for if you have established credit.
Most banking institutions offer lower interest rates for personal loans and lines of credit than they do for credit cards. Interest rates tend to be about 2 percent lower than credit cards. This makes borrowing money cheaper. However, as with auto financing, interest rates can vary greatly from lender to lender. Before deciding on a lender, we recommend contacting several institutions to compare programs and to get an idea about the going rate.
If you obtain a loan from a financial institution where you also have a checking or savings account, be advised that the money in these accounts may become vulnerable. In certain circumstances, financial institutions have offset rights. This means that if you default on your loan, the lender has a right to take money out of your checking or savings account to satisfy the debt. The financial institution can do this without your permission. The old rule of thumb is: Never borrow where you save.
What is a Secured Loan?
When you borrow money, the lender may or may not require you to pledge collateral to guarantee repayment of the debt. If collateral is pledged, then you have a secured loan. Collateral can be anything of value, but remember cash is NOT collateral -- lenders do not require you to send cash as collateral or "insurance", so beware of anyone telling you to wire them money to "secure" a loan.
Your home's equity is one of the best sources of cash. For homeowners, interest rates are often quite low. With equity, you can finance big-dollar expenses, such as car purchases, home remodeling, or medical expenses. Of course, you are funding these things with a secured loan if you chose to use equity; your home is the collateral. But, if you have the discipline to make the payments, you can save a lot of money over using credit cards.
secured loans, If you do not repay what you borrow, then the
lender may use your collateral to satisfy the debt. Equity is an often overlooked source of money, and is a great way to pay for things you need. Equity is much more cost efficient than high interest credit cards. But make sure you can make the payments, on time, every month.