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Personal Loans Explained

If you wish to know about every essential thing when it comes to personal loans, you have come to the right place.

What is a personal loan?

A personal loan is a sum of cash you borrow from a lender and pay back in monthly installments over a given period of time. You can use a personal loan for anything personal, including consolidating your credit, paying for bills, making home improvements, to take a vacation or just about anything else you can come up with.

How do personal loans work?

Majority of personal loans come with fixed interest rates and monthly payments that allow you to pay back over a several months or years. Unlike credit cards which do not give you a set term for making payments, a personal loan gives you the exact timeframe for paying out the entire loan plus interest.

With personal loans, you will not get access to additional funds as you make payment (as is the case with credit cards), you will know the exact date that you should be done paying your loan. After repaying a loan successfully and on time, New Era will be willing to offer you even bigger loans in the future.

Unsecured vs Secured Personal Loans

Personal loans can be divided into two main categories: unsecured and secured.

Secured loans

With a secured loan, you will be required to put up some type of collateral to get approved. This provides a sense of security to the lender, since they still receive an asset as compensation in case you default on the loan payments. Depending on the type and amount of loan, collateral can be in the form of your car, your home or other valuables.

Secured personal loans will typically have lower interest rates compared to other types of loans. However, you risk losing your asset if you are unable to pay off the loan.

Pros to secured loans

  • The interest rate on personal loans is generally lower compared to payday and unsecured loans.
  • Again, due to less risk, those with a poor credit score stand a better chance of qualifying for a secured loan compared to an unsecured one.

Cons to secured loans

If you default on your payments on a secured personal loan, the lender may be forced to seize your car, home or whatever you put up as collateral.

Unsecured personal loans

Unsecured personal loans do not require the borrower to put up any form of collateral to be approved. Depending on the lender, factors such as credit score and income are used to assess your request as a borrower.

When you default on either a secured or unsecured loan, creditors will report your shortcomings to credit bureaus and your credit score will take a hit because of this. This may make it impossible to access loans at affordable rates in future.

Pros to unsecured loans

  • You are not at risk of losing any assets if, for whatever reason, you are unable to pay back the loan

Cons to unsecured loans

  • In most cases, unsecured personal loans charge higher interest rates than secured loans
  • Unsecured loans are generally harder to get compared to secured loans since you may need a better credit score and credit history.

Installment contract loans

An installment sales contract loan is an agreement whereby the lender agrees to sell something to the borrower on credit and receive payment plus of the value of the asset plus interest over a fixed period of time.

You can use an installment sales contract loan for buying:

  • Real estate
  • Vehicles
  • Equipment
  • Other large purchases

There are many benefits of this type of loan to the buyer/borrower, which include:

  • No need to apply for a mortgage or auto loan
  • Bad credit history does not have any impact
  • You can take advantage of tax breaks associated with ownership
  • Expensive items and capital investments become easier to afford

How do installments sales contract work?

The borrower and the lender agree on the following:

  • The final price of the asset being sold
  • The payment period
  • Any down payment amount to be paid
  • The interest rate charged by the lender

Once these terms have been agreed upon, the two parties sign a contract. In most cases, the buyer is required to pay a stipulated down payment upfront, after which the buyer pays the remaining amount in monthly installments until the whole amount is cleared.

Note that the buyer takes equitable ownership of the item bought as soon as both parties sign the contract and the buyer pays the down payment. As a result, the buyer becomes liable for any fees, taxes, licenses or maintenance costs for the purchased item.

Furthermore, note that the seller retains the legal ownership of the item and the final transfer happens only after the final installment has been paid. If the buyer defaults on the installments, the seller may take action to retrieve the asset and the buyer will have to forfeit the installments that they have already paid.

Which type of loan will work best for you? Depends on three major factors

How much monthly payments you can afford to make; your installment amount will be heavily dependent on the interest rate of the loan

Your credit worthiness

The valuables you own that would qualify as sufficient collateral and your willingness to risk it

Benefits of Personal Loans

When managed responsibly, a personal loan could

Save money

Using a low interest personal loan to consolidate high-interest credit card debt can help you dig yourself out of debt faster and save you money on expensive interest payments.

Relieve stress

life happens and sometimes bad things happen to good people. Unexpected life events can cause a lot of financial strain and emotional stress as well. When a sizeable medical bill pops up, or your car is written off, a personal loan could help make a stressful situation a little bit better.

Adding financial value

You can use a personal loan to make improvements to your house which would increase its value. You can also use personal loans to acquire assets that will improve in value over time. This could ultimately boost your net worth.

Help build or boost your credit score

Managing a personal loan responsibly can help improve your credit score if you pay the installments in good time.

Borrow only for the things that will lead to greater progress

It is important to use the money from a personal loan to build a better life for yourself and pay only for the things that will help you achieve greater financial success, personal success or both.

Although it might be tempting to borrow more than you need so that you can have even more to spend besides what you actually need, remember that you will have to repay this money with some interest on top.