Personal loans are a way of life for many people today. While this can be a good way to establish and maintain a good credit rating, no loan should ever be taken out without careful consideration.
First of all, the borrower needs to consider what they want the money for. Sound financial judgement would dictate that taking out a personal loan for a new TV or the latest smart phone is not a wise move. However, if the borrower needs a new car, or wishes to consolidate many bills into one, a personal loan can help.
Personal Unsecured Loans
The two most common types of loans are personal unsecured loans and personal secured loans. If the amount is relatively small, a personal unsecured loan may be used. An unsecured loan means that no assets have been used to back up the person’s promise that they will pay back the loan. The lender is trusting fully on the borrower’s word that they will pay back the entire amount owed, plus interest.
A personal unsecured loan is much riskier for a lender, and therefore there will be more stipulations with this type of loan. For instance, the lender may charge a penalty if the loan is completely repaid before the end of the repayment term. Also, they tend to charge a higher rate of interest on these loans, so that if the borrower would happen to default, they would have still regained some of their investment.
Personal Secured Loans
A personal secured loan is a loan that is backed by some sort of asset, whether that is cash or an object such as a car. Often, with a car loan, the lender will use the car as collateral, or a security, on the loan. This means that if the borrower defaults on the loan, the bank can repossess the vehicle.
Line of Credit
A line of credit also falls under the category of personal loans, although it is not as widely used. A line of credit is revolving, which means that the borrower can continue to borrow and repay the amount borrowed. If the borrower does not renew the line of credit, then the entire amount will be due.
Dangers of Personal Loans
There are definite advantages to taking out a loan for personal use, such as building up credit, and purchasing an item that would otherwise be impossible. However, there is danger in taking out a loan of any kind.
First of all, the borrower should know exactly how much they have borrowed, the amount of interest owed, and when the loan will be paid off. They should inquire if there is a fee to repay the loan early, if they should happen to have the money to do so.
If a borrower defaults on an unsecured personal loan, their credit score will plummet. Also, if the account is turned over to a collections agency, they can be sued and their wages garnished until the debt is paid. A loan is nothing to laugh at. It is a very serious undertaking and the person who decides they need a personal loan should take great pains to make their payment on time each month.
Any type of personal loan will come with an interest rate. In South Africa, the National Credit Act states that the maximum interest rates lenders can charge are twenty three percent if the loan is R10,000 or less, and twenty percent if the loan is more than R10,000. This is a great protection for consumers, as other countries do not regulate their interest rates, and many unlucky citizens have seen astronomical rates applied to their loans.
When someone is ready to take out a loan, they should do their research and check out interest rates between the various lenders. While it may seem that all lenders will charge a similar rate to a person with a similar credit score, this is not at all true. As long as lenders stay within the law, they can charge any interest rate they like.
Personal loans can be a great help to people at certain times in their life. The borrower should just remember to exercise caution and be smart financially before taking this step.