Personal Loans: What Can They Be Used For?
- 13th July 2018
- Posted by: Loanable
- Category: Resources
Q: What is the difference between a bank loan and a personal loan?
A: There is no difference, a bank or any lender can grant a personal loan. A bank loan is just a loan from a bank. Banks take money in, through current accounts, savings accounts, and other investment products.
Lenders just grant loans, they do not offer savings vehicles, or current accounts. But the personal loans both banks and general lenders make, are the same.
Q: If I take out a personal loan, what can the loan be used for?
A: Anything. A personal loan is simply a loan given to you for whatever purpose you feel you need the loan for.
You can use a personal loan to make a purchase, such as buy a car.
If you are buying a car from a private seller in all probability they will want cash as the form of payment. If you don’t have the cash saved, you may wish to take out a loan. Once approved for a personal loan and having the cash-in-hand, you can shop around and negotiate with private sellers to find the car and deal you want.
Personal loans can also be used for home improvements, if you want to add a conservatory, do repairs, or decorate.
One popular use of personal loans is for debt consolidation. By consolidating credit cards and other outstanding debts into one, you may save money as the monthly payments can be less.
Personal loan are a good way to break the payday loan cycle. When you take out a payday an it is due to be paid on your next payday, which can cause a bit of a financial hardship for some borrowers. So they may roll the loans over, keeping themselves in debt and costing them high fees and interest rates.
By taking out a personal loan to consolidate any credit cards and any payday loans, it allows you to budget better, and free up some money that you can use to pay the loan off quicker.
Secured or Unsecured
When considering a personal loan, for any purpose, the basics of the loan can be broken down into to categories:
The loan can be secured by something, collateral, or not secured.
A secured personal loan may be secured by a car, a property, caravan, anything of value that a lender can use to reduce the risk of the loan. The loan is usually used to purchase that item, or if the loan is for home repairs or improvements, the loan may be a second charge against the property.
If the borrower defaults on the loan, the lender can look to repossess the collateral, or item securing the loan.
Secured personal loans can have longer terms, and lower interest rates than unsecured personal loans. As they are secured, the bank or lender may not require a guarantor, or place such a large emphasis on credit scores or credit history.
Unsecured personal loans do not have any collateral, so they are deemed a higher risk to a lender. They may carry a shorter term, or higher interest rate.
Using a personal loan for debt consolidation or for home improvements, you need to weigh as to if you want to take out a secured personal loan, or unsecured.
As a property owner, using a secured personal loan to consolidate credit cards and other debts, you are in essence taking unsecured debts, and making them secured as the consolidation loan could be secured by your property.
Failure to pay the payments could put your property at risk.
The terms, which are the interest rates, and length of a personal loan can vary.
Loan terms can be from 12 months to 60 months (5 years), or even longer. It can depend on the loan amount, is the loan secured or unsecured, and the lender.
Secured personal loans tend to have lower interest rates, but that doesn’t mean an unsecured personal loan may not have a low interest rate.
Again, it depends on the lender, purpose of the loan, and also the borrowers credit rating.