The primary purpose of personal loans is to provide an efficient way to deal with pressing financial issues, especially in cases when your bank turns you down due to bad credit or any other reason. However, as simple and convenient as they are supposed to be, personal loans may be difficult to understand. There is no universal definition of a personal loan, nor is there a universal categorization that could help you figure out exactly what kind of loans they are and what they can be used for. This is in part due to the variety of loans that can be considered personal, keeping in mind the reasons people seek them. This post is designed to explain what personal loans are, what purposes they may serve, and what types of personal loans currently exist.
Defining The Term
Let us first provide a simple definition of a personal loan. Designed as a great alternative to credit cards, a personal loan is a loan designed to allow the borrower to cover personal expenses that exceed the borrower’s current budget. In technical terms, a personal loan represents funds obtained from an entity such as a lender or a personal loan company. This entity lends the necessary money at specific terms, some of which include interest charges and additional fees, as well as the amount of time over which the loan should be repaid.
Personal Loans Categorized By Use
As we have already mentioned, personal loans can be used to cover virtually any kind of personal expenses. However, there are several most common reasons why people take out personal loans.
Personal loans can be taken out in cases of emergency. The companies that specialize in offering these types of personal loans are known as emergency loan companies and they strive to provide the money you need as quickly as possible, without any unnecessary complications.
Another common reason to take out a personal loan is to deal with money shortage until the next paycheck. This particular variety of personal loans is labeled as payday loans and it is provided by specialized payday loan companies. If you spend your paycheck earlier than expected, this loan is designed to help you make it through the month.
A personal loan can also be used to repay a debt, which may include an existing loan, a credit card debt or basically any debt to another individual or entity. This type of loan is provided by debt consolidation loan companies.
Personal loans particularly designed for car owners in urgent need of extra cash are known as auto title loans. They fall into the broader category of title loans that allow you to take out a loan against your vehicle, real estate or other assets. If you need money fast for whatever reason, title loan companies can lend you the sum you need and keep your title as collateral.
Personal loans are also suitable for individuals who want to invest in their homes. Whether it is a minor investment, such as getting new furniture, or a major investment, such as building a second floor, a personal loan can make it happen. Loan companies that specialize in this type of loan are referred to as home improvement loan companies.
A personal loan may be used to get a new car as well. If your heart is set on a car you cannot really afford at the moment, there is no need to stress over it, as there are personal loans designed particularly to help you get the car you want right away. This kind of loan is provided by auto loan companies.
Finally, if you are faced with a personal expense that does not fall into any of these categories, such as a vacation, wedding or anything in between, you can still get the money you need by taking out a personal loan. In this case, you can simply turn to personal loan companies that specialize in offering personal loans in general, regardless of the purpose. These loans include parent loans, student loans, mortgage loans, and a variety of other loans for personal use.
Secured & Unsecured Personal Loans
The terms secured and unsecured loans refer to the presence or absence of collateral. If you are not giving the title to your home, vehicle or any other asset as collateral, the personal loan you are taking out is unsecured – and vice versa.
Personal loans are usually unsecured. Generally speaking, the types of personal loans that can fall into the unsecured category are nearly all of the personal loans described above, including payday loans, debt consolidation loans, emergency loans, home improvement loans, auto loans, and others.
Of all the types of personal loans previously described, only title loans are always secured. You sign the title to an asset over to the title loan company and it is regarded as collateral based on which your loan is granted.
Short-Term & Long-Term Personal Loans
The definitions of short-term and long-term loans vary immensely. However, it is generally considered that a short-term loan is a loan that is repaid in less than a year, although the duration of a short-term loan can sometimes be as long as 5 years. On the other hand, long-term loans are for major investments, they involve larger sums, and they are repaid over the course of several years or even decades.
Personal loans that are designed as quick solutions for temporary money shortage and involve smaller sums of money normally fall into the short-term category. For example, payday loans are normally designed to be paid back once you receive your next paycheck. Title loans and emergency loans are usually short-term as well and often meant to be repaid within a month.
Long-term personal loans generally involve larger amounts and may include home improvement loans, auto loans, and loans for consolidation of larger debts.
It is important to keep in mind that most personal loans are normally short-term, that is, their durations do not often exceed 1 year and rarely exceed 5 years. However, this largely depends on the sum loaned/borrowed and the terms set by the company.
We hope that this post has helped you better understand personal loans, identify the kind of personal loan you require, and make a safe, informed decision.