Ultimate Guide To Personal Loans  

Personal loans are one of the most versatile types of loan options. You can either go ahead and settle your debts with it or deal with your emergencies. However, they usually come with fixed interest rates and repayment schedules, so factors like your income and credit score become vital.

If you want to learn more about how to get a personal loan in Canada, click here.

How Does Personal Loans Work?

Once you meet the given eligibility criteria for personal loans and finish the paperwork, the bank will transfer the money to your bank account. You need to withdraw the cash; you can withdraw the whole sum of money at once or partly as you need. However, make sure you are using the money for the reasons specified by your lender.

Personal loans are comparatively risky and are considered “unsecured loans” by the banks. If you default on any personal loans, the bank can take legal action against you to collect the owed money. Besides, the interest rate will be higher in the case of personal loans because of their low security compared to home loans.

Best Uses for Personal Loans

Personal loans are taken out for varied purposes, but if you are wondering about their best possible usage, here are some for you.

Child Adoption

Child adoption can cost you up to hundreds and thousands of dollars with all the formalities involved. Availing of a personal loan to adopt the child can help you bring your child home sooner.

Business Start-up

Starting a new business requires a substantial investment. You will not be initially eligible for a business loan. However, taking a personal loan seems to be the ideal option. Be serious with the money and put it to actual use because you might want to pay premiums from your business profits. It is a form of bootstrapping where you tap in your own net worth to fuel a new business.

Home Repairs

Homeowners can get a home remodelled out of term loans, second mortgages or using a home equity line of credit. But if you need money for regular repairs like roof or plumbing, you can always go for personal loans without a second thought.

Make sure you do not fund major reconstruction with a personal loan. This would take a longer time to repay, resulting in exorbitant interests.

Meeting Emergencies

Not everyone has a hefty emergency fund or a credit card to fall back whenever an emergency kicks in. In such a situation, going for a personal loan can aid you greatly. With such a huge sum of money, you can create an emergency fund or meet the immediate expenses.

Debt Consolidation

If you are already paying a high-interest rate on existing debt, clearing it by taking a personal loan seems to be a suitable option. There’s no point in paying a huge sum of interest when you can avail of personal loans at a comparatively lower interest rate.

Medical Expenses

Before availing of a personal loan to afford the medical expenses, ask your lender about a zero percent interest rate payment plan. If you can’t afford the required payments, a personal loan could help you cover the medical expense.

Types of Personal Loans

There are many types of personal loans, and each comes with its requirements and eligibility.

Secured and Unsecured Personal Loans

Personal loans are usually unsecured loans, which depend solely on your ability to repay the loans. Factors like your credit score, annual income, and debt to income ratio are considered while availing the unsecured loans. Such loans usually have a higher rate of interest compared to secured ones.

If you want to secure a personal loan, you need to keep collateral like a car or a house in line. While purchasing such assets, you can show them as collateral for the personal loan and avail a lower interest rate as well. If you fail to pay the loan, the lender could repossess the collateral.

Fixed and Variable Rate Personal Loans

The majority of personal loans have a fixed rate, which means the interest rate would remain the same during the loan term.

If you are going for a variable-rate personal loan, you must know the reset periods. It is best to do a comparative study of your proposed loan under both methods and choose the economical one.

However, variable-rate personal loans usually come with a higher interest rate and are considered much riskier than fixed-rate personal loans.

Personal Lines of Credit

Unlike any other loans where you receive a lump-sum credit in your bank account, the personal lines of credit are revolving loans. With such loans, the whole approved amount is credited to your bank account, but you only end up paying interest on the sum you withdraw. It does not only help you save on the interest amount and keeps your debt to income ratio in check as well.

Short and Long-Term Personal Loans

The usual term of a personal loan is seven years. Such moderate loans usually come with a six percent to seven percent interest rate.

Alternatively, the long-term loans go for 10-plus years and usually come with a lower interest rate. Comparatively, short-term loans are loans with a term of fewer than five years, and the rate of interest is much higher.

Conclusion

To conclude, personal loans are easy to come by but dealing with them isn’t really easy. You need to be aware of your financial condition and credit history before taking a personal loan. Given that most personal loans do not involve collateral, it is a sought-after credit product. However, the interest rates are often higher than most other forms of credit. Thus, it shall be viewed as a last resort of credit. Once availed, it should be your responsibility to take care of your finances and pay the monthly premiums on time.