Personal loans are generally unsecured loans that a borrower obtains for various purposes. This type of loan is often used to consolidate outstanding debt into one monthly payment, but it can be used for other things such as paying for a wedding, a holiday, etc. It is an unsecured loan because the borrower doesn’t put any assets up as collateral.

Because it is unsecured, this type of loan usually comes with a higher interest rate than other types of borrowing. The lender is taking a greater risk by lending without the security of collateral, so they charge the borrower more to help offset the risk.

Additionally, it often comes with restrictions on how you can spend the money you receive, and the amount you can borrow is usually less than with a secured loan. Again, the bank is taking more of a risk by underwriting an unsecured loan so they want to make sure the money is used for the purpose stated in the loan application.

Interest on loans
Interest is the price paid for using somebody else’s money. It is always expressed as a percentage – for example 12%. This means for every $100 borrowed you pay a cost of $12 per year. There are several ways to calculate it but the most common is on monthly or daily balances.

There are two basic sorts of interest, “reducing” and “flat”.

With “reducing” the interest you pay is calculated on the actual balance outstanding. This is the way that most home loans work.

When “flat” is used, you are charged interest all the time on the amount you originally borrowed, irrespective of what you owe.

Loans with flat interest rates have fixed interest because the interest is calculated at the outset. However, these loans are generally for short terms, and at relatively high rates, so that the lender runs little risk in fixing the rate.

Fixed or Variable Rate
When a loan is taken out, the interest rate will be either fixed or variable. Today most loans with which you will come into contact have variable interest rates. This means that the lender can change the rate at will. Most bank loans, building society loans, credit union loans and finance company loans have variable rate mortgages but each of these institutions can offer loans with the interest rate (or the monthly repayments) fixed for a period of up to three years. It is possible that they will charge a slightly higher rate if the interest is to be fixed for a period. Lenders are offering a range of loan options now, so it is most important to negotiate and clearly understand the rate and conditions at the time the loan is being sought.

Split loans
These are loans that are part fixed and part variable. Reduces risk against changes in interest rates.

Interest-only loans
Interest-only loans are usually made at a fixed rate and with an interest only loans your regular monthly repayments are comprised of nothing other than interest charges. At the end of the loan you still have the principal to pay (the original amount borrowed). They are also usually inflexible with heavy fees payable if the loan is paid off before the contract end. The benefit comes from a lower monthly repayment.

Secured or Unsecured
If lenders have a higher than average risk in making a loan they will charge a higher rate to compensate. If you can offer the lender some security you can often negotiate a lower interest rate. Lenders prefer a first mortgage over property for security because history has proven that well located property holds its value best in difficult times.

Where Can I Find A Lender?
There is no shortage of lenders who make unsecured loans so you have many resources available to you. The internet is also a rich source of prospective lenders. If you already have a lending relationship established with your bank or another institution, this is a good place to start. Many lenders are more willing to underwrite such a loan for a customer who has already demonstrated a responsible and timely payment history. Make sure you fully understand the fine print of their loan policies and expect to pay a higher interest rate if the lender regards you as a higher risk borrower.

For many borrowers, an unsecured loan is a good choice for their specific circumstances. Whether it’s debt consolidation, paying for a wedding or some other purpose, if you’re considering personal loans it’s important to check out multiple lenders and look for a lending program that meets your needs.

What If I Have A Poor Credit Rating?
Your credit rating will be a consideration for the lender. The combination of a poor credit history and an unsecured loan is unattractive to many lenders, so if you’re in this situation you will likely have to work a little harder to get a loan. More info see: Credit File & Credit Ratings

Personal Finance
Personal Finance, personal loans