When you think of loans, mortgage loans, auto loans and student loans are probably the first that come to mind. However, there are many other situations in which some extra cash could come in handy. In these cases, you might take out a personal loan. Personal loans involve regular payments and interest rates just like mortgage or auto loans, but they also have some unique features borrowers should know about.
What is a personal loan? Why would you want one?
In a typical secured loan – like a mortgage or auto loan – the lender can repossess the item in question if you fall behind on payments. Personal loans are also called unsecured loans, and they work a little differently. You may take one out to fund an event (like a wedding or a vacation), a home improvement project or a catastrophic expense. Because there’s nothing for the lender to repossess, you’ll pay a bit more in interest, plus any other loan fees your lender may attach.
You may also take out a personal loan to pay off debt. Imagine you’re paying 18% interest on your credit card balance, but you can get a personal loan at 13%. You might pay your credit card bill with a personal loan and make monthly payments to your lender instead. You’d pay less in interest over the life of the loan and have fixed monthly payments.
Because personal loans are reflected on your credit report, handling one responsibly can also boost your credit. On the other hand, defaulting can hurt your score, so don’t take out a loan if it’s not in your budget.
What affects your personal loan rates?
If you and your neighbor both take out a personal loan, you may get completely different rates. Why? Like a mortgage or auto loan, your rate depends on a few factors.
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