What is a Personal loan?

The main characteristic of a personal loan is that it is not secured by collateral. "Collateral" means something of value, like a home, boat or car that the lender can repossess if you don't repay the account as agreed. Personal loans are backed only by your promise to repay, and for this reason they are also known as "signature loans" or "unsecured loans." This kind of financing usually (but not always) comes with a fixed interest rate and a term ranging from one to five years. Unsecured loan amounts vary, but most run between a minimum of $1, 000 and a maximum of $50, 000.

Qualifying for a Personal Loan

Because the lender must rely solely on the borrower's willingness to repay the loan as agreed, credit scoring is extremely important - it's widely believed that the way you've managed your obligations in the past is highly predictive of your performance when borrowing in the future.

The lender takes your application and verifies your income and debts. Your income and debt picture influences the amount the lender is willing to advance you and how long it is willing to lend the money. The lender also pulls a credit report, examines your scores and assigns you a credit grade.

Depending on your credit grade, loan amount and the length of time you wish to borrow, your personal loan rate will likely fall between six and 36 percent. Rates and terms vary considerably, so it's wise to shop a bit and obtain quotes from several competing lenders.

Personal Loan Uses

What can you use a personal loan for? Signature loans can be used for just about any purpose, from consolidating debt to funding investments or financing big-ticket purchases. Borrowers should compare personal loans to other types of financing - for example, if buying a car, secured auto financing is probably cheaper, and if funding an education, government-backed student loans might make more sense. However, unsecured loan interest rates are likely to be lower than those of credit cards, and personal loans can make budgeting easier with their fixed rates and unchanging payment schedule.

7 Uses for Personal Loans

1. Debt Consolidation
2. Education Expenses
3. School Books
4. College Tuition
5. Wedding
6. Vacation
7. Pay off credit cards

Note: LendingTree does not recommend taking out long-term fiancing for short-term needs. However, consumers determined to finance a short-term need might be better served by a personal loan than another option like a credit card.

Personal Loan Advantages

Personal loans are unsecured, which means the lender cannot repossess your property should you become unable to repay your balance. There is no collateral to appraise, so getting an underwriting decision and receiving your funds can happen very quickly. They are safer than credit cards because their interest rates are usually fixed, and because they have a definite payment schedule, personal loan balances can't be "run up" again. Personal loans can improve your credit rating, because credit scoring systems treat installment debt more favorably than revolving debt like credit cards. Finally, personal loans usually come with lower rates than comparable credit cards.

Interesting facts

• The FDIC site includes, free to the public, about 30 instructional lectures on personal money management and general financial education. Topics offered include: the use of a checking account, why it's important to save, what it means to secure a loan and the costs involved, the advantages and disadvantages of owning vs. renting, why it's...
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