Probably at some point in your life you have thought about the possibility of applying for a loan to get out of any trouble or to acquire a large amount of money that cannot be arranged immediately. A personal loan can help you in acquiring the required financed needed to remodel your home, start a business, cope with an emergency expenditure or even go on a trip with your family and friends. Personal loans can help in getting the required money in all of these cases and more, but it is important to first know what they are and their advantages and disadvantages.
How personal loans work?
A personal loan is a financial instrument through which a private or governmental financial institution will lend you some money that you will have to return at a certain time, and you will need to pay a certain amount of interest on the amount that you borrow. As a line of credit, a personal loan can either be secured or unsecured. Secured personal loans require you to leave a personal asset such as a house or any property as collateral to minimize the risk to the lender. While those who do not ask for collateral charge more interest because their risk to lend money is greater.
The best part about personal loans is that, the application process is fast and simple. The loan can be approved within 24 to 72 hours and once approved the loan amount is also credited to the bank account of the applicant within no time. Thus, they are ideal for those who need to fast cash to meet their financial responsibilities during a personal emergency. There are numerous financial institutions around the world that offer personal loans and each of these institutions has different eligibility criteria. The interest charged or the loan amount offered also differs from one financial institution to the other.
Line of Credit Versus Personal loan
The biggest difference between a line of credit and a personal loan is how the lender distributes the money. When you borrow money through a personal loan, the lender disburses the total loan amount at once. While on a line of credit the lender disburses the money in small instalment. Thus, a line of credit may not be able to help you with your financial emergencies but it can provide you with the required financial assistance for a regular expense. On the other hand, a personal loan can go a long way in helping you to deal with all kinds of financial emergencies.
Advantages of a personal loan
Here are some of the advantages of a personal loan:
- You can avail large amounts of money by applying for a personal loan.
- The loan amount can be used for whatever you want because it is not necessary for you to specify the purpose of applying for the loan.
- Since the beginning of the loan tenure, you will know how much money you need to pay and when to make the instalment payments.
- It allows for better organization in your personal finances.
The interest rate charged with the loan can either be fixed or floating. If it is fixed, the rate of interest will remain constant during the tenure of the loan. Alternately, if it is a floating rate, the rate of interest is most likely to change during the tenure of the loan. Fixed rate personal loans offer the applicants with the convenience of paying the same amount of instalment payment every month. Whether a floating rate might reduce or increase the monthly instalment amount to be paid, depending on market conditions.