Most personal loans lack collateral property that can be taken if the borrower defaults, so they rely on the integrity of the borrower to repay the loan’s principal and interest. In many cases, lenders do background and credit checks on potential borrowers to assess their risk.
Personal loans used to be simple part of the American economy. Homegrown savings and loans lent money to buy boats and barbeque pits based on the reputation of their customers. If you had a job, paid your bills on time and were known to be honest, there was loan money available.
Personal lending has changed a lot. In today’s mass society, giant national and regional banks rule and loan underwriting is anything but personal. Though banks still make open-ended loans to their best customers, the review process can be difficult and the terms might discourage all but the most determined customers. Today’s borrowers often turn to family members, friends and peer-to-peer lenders for personal borrowing.
A personal loan is usually unsecured. This kind of loan is used for everything from funding an education or financing a new business venture to purchasing luxury items or taking a lavish vacation. Unsecured loans are made without collateral, so lenders consider them risky. Credit card debt is unsecured, since the lender has nothing to seize if the borrower defaults.
A secured loan uses an asset, usually a house or car, as collateral. If the borrower defaults on the loan, the creditor can take the asset. Lenders can seize property with secured loans, like home mortgages and car loans. The lender can foreclose the home or repossess the car if the borrower stops making payments.
Personal loans have evolved over the years to meet the changing needs of the consumer. It used to be nearly impossible to get a personal loan with a limited or poor credit history, but today there are loan options for people with bad credit and those without a detailed financial track record.
Benefits of Choosing a Personal Loan
One benefit of a personal loan is in the name: It’s personal. You can use it for any reason you like and you often don’t need collateral to get one.
You can use personal loans to cover practical expenses like credit card consolidation or remodeling a bathroom to something whimsical like buying a boat or taking a European vacation. The choice is yours.
Personal loans, especially unsecured ones, usually require an application and verification of your financial standing. Though banks or credit unions make personal loans, the new trend is toward less conventional lenders.
Family and friends can be the source of money, though it is advisable to have a formal loan agreement with them to make sure the relationship doesn’t go sour.
There also are many peer-to-peer online lending sources like Prosper and Lending Club, as well as sites like Kickstarter.com and IndieGoGo.com that cater to entrepreneurs. The online sites normally charge a fee, but if you need money quickly they represent an option.
Other benefits of personal loans:
- You get the money faster. In most cases approval is much quicker than with conventional loans.
- Don’t need a bank. The money could come from a credit union, an online lender, a family member or friend.
- Fixed rate interest, fixed length of repayment and fixed monthly payments.
- Loan amounts available from $1,000 to $100, 0000.
- Lower interest rates than credit cards.
- If loan comes from a bank, possible discounts on interest rates.