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Personal Loan

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What Is A Personal Loan?

A personal loan is a type of loan that helps you meet your own financial needs. Usually, it does not require collateral.

Deeper Definition 

A personal loan is a loan you take to finance various personal needs. For instance, you may take a person to plan your dream wedding or vacation.

Personal loans are usually unsecured, meaning they do not require collateral. Lenders decide whether to approve such loans based on factors such as the borrower’s credit score, debt-to-income ratio, and free cash flow.

This particular type of loan allows you to borrow money to cover your own expenses and then repay at a specified time with interest. The interest rate, fees, and terms on personal loans vary depending on the lender.

It is an installment loan. However, it differs from other installment loans such as student loans, car loans, and mortgage loans, in that what you do with a personal loan is left for you to decide. However, some lenders may set some restrictions on what you are not allowed to do with the loan.

There are two kinds of personal loans:

  • Secured: This type of loan requires you to provide collateral to secure your loan.
  • Unsecured: This type of loan does not require you to provide collateral to get them.

Defaulting on this type of loan could cause significant damage to your credit score, and If you secured the loan, you might lose your collateral. Often, interest rates on an unsecured loan are higher than a secured loan.

Personal Loan Example

Christina wants to purchase a new phone, but she does not have enough money to buy the one she wants. Instead of waiting for her next salary, she takes an unsecured personal loan from an online loan app. The loan terms stipulate she must pay back the loan within 15 days at a 5% interest rate or 30 days at a 12% interest rate. 

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