Money-au

A personal loan is an agreement to borrow money between a consumer and a lender. The financial institution lends the consumer cash for a specified period of time and in return gets paid interest on the loan.

People can borrow using a personal loan for many reasons, they can use the money to finance a new purchase, pay for renovation or consolidate existing debt. Once the loan has been approved there is no restriction on how the cash can be used.

In general personal loans are unsecured debt which means they cost more than a secured loan. The difference between the two is unsecured loans do not require the borrower to post collateral whilst a secured loans do require collateral. Therefore the lender charges higher interest on unsecured loans than they would for a loan that is secured by collateral.

There are two main types of personal loans, one is a line of credit the other a closed end loan. Lines of credit work in the same way as a credit card does, the amount of credit available is fixed but rotates, that is to say you can borrow the cash but once you pay the debt off, the available credit remains. Most people will be familiar with over draft facilities which are personal lines of credit. A closed end loan is a onetime grant for a fixed amount of cash made through a contract between borrower and lender that once paid off would need to be renewed through a new contract if the consumer wishes to borrow money again.

Unsecured personal loans are typically only offered to borrowers with a good credit score. Some banks will lend money to people with low credit scores but such loans tend to cost a lot of money and really should be avoided. Secured lines of credit are a better way to borrow when there is a low credit scores and can be used to improve the credit rating.