What is a Personal Loan
A common type of loan that many individuals avail of is PERSONAL LOAN. What really is a personal loan? According to Business Dictionary (BD), personal loan is a type of BORROWING where an individual is granted a consumer loan specific for personal expenses (medical), family expenses (education), and/or home improvement expenses. The loan is either unsecured or secured by assets of the borrower. In some cases, the lender will require the borrower to have somebody co-sign the loan. Unsecured loans also known as signature loans are advance loans, because its approval is based on the borrower’s credit history, rating and ability to pay back the loan from his (the borrower’s) personal income. Repayment schemes for this type of loan are normally via fixed amount amortization with terms of six months to a few years, depending on the loan amount involved.
Personal loans are usually categorized as secured or unsecured. Because there is no collateral attachment to unsecured loans they are usually allotted to people whose credit ratings or scores are more than above average. Most lending institutions such as banks are very careful in providing unsecured loans unless the applicant is well known to the bank or preferably a long time client and/or depositor of the bank. They also make sure that the applicant has proof of more than enough monthly income to cover the amortization cost of the loan. Since unsecured loan is not tied to any collateral, this type of loan usually incur a higher degree of interest. CREDIT cards are classic example of unsecured loan.
Secured loans are easier for borrowers to access. As long as the applicant is able to secure the loan with collaterals, chances are the loan applied for will be approved. Most banks would require that the collateral be of the same value or higher as that of the amount being applied for by the borrower. As compared to an unsecured loan where the risk is burdened on the lender, risk on secured loans is placed on the borrower considering that he (the borrower) may lose the asset he had secured in the event of a default.