Choose the Best Personal Loan


Personal Loans are granted for personal (medical), family (education, vacation), or household (extension, repairs, purchase of commodities) use. In other words, a personal loan is a loan that is granted for personal use. It is usually unsecured and based on the borrower's integrity and ability to repay the loan. Repayment occurs usually through fixed amount installments over a pre-decided term called Equated Monthly Installments. The loan is also called a Consumer Loan.

Types of Personal Loans

There are two types of Personal Loans:

  • Secured Loan

  • Unsecured Loan

A secured loan is one which is backed by a collateral (any movable/non movable asset). This may be a home, a boat, a car or another fixed financial asset. Lack of repayment would result in the seizure of the property. If you secure a loan with a home and are unable to repay the loan, you could lose your home to foreclosure.

An unsecured loan is not secured by anything other than the signature of the recipient. It is usually based on the general creditworthiness and past history of repayment. As it is unsecured, the lender will charge a higher interest rate because of the additional risk.  If not repaid, the lender would resort to legal claims to recover the loss.

There are other types of personal loans that may be secured or unsecured such as

  • Home Equity Personal Loans

  • Short Term Personal Loans

  • Secured Personal Loans

  • Fast Cash Personal Loans

  • No Credit Personal Loans

  • Military Personal Loans

  • Second Chance Personal Loans

  • Christian Lending Personal Loans

All these are available to a person who is looking to borrow money for a period of 1-5 years.

Home Equity Personal Loan

If you have enough equity (total assets minus total liabilities) on your home, you might be able to get a personal loan secured by your home equity. Advantages of a home equity loan are:

  • The interest rates in case of Home Equity Personal Loans are lower because the money is secured by your home, which is a big security.

  • You may be able to borrow a larger amount as you have kept your home as the security, which is a costly asset.

  • The repayment term will be longer as the amount given on loan is large.

  • The payments, EMIs, may be lower as it would be spread over a larger loan repayment period.

  • A major disadvantage of using your home’s equity as a personal loan is that if you cannot repay the loan, you could lose your home to foreclosure.

Home Equity Line of Credit

If you have enough home equity and do not want or need all the money at once, you might want to consider a personal line of credit secured by your home.

The major advantages of this approach are:

  • You only pay interest on the amount you borrow

  • You have complete control over how and when you use the money

  • The payments to be made are interests only, hence, they are usually lower

  • The disadvantage is that if you cannot repay the line of credit, you could lose your home to foreclosure

Short Term Personal Loans

Short term personal loans are granted for a short period of time. Here, the rate of interest is much higher as the repayment period is not long. An example of a short term personal loan is a title loan, where you borrow an amount secured by the title of a vehicle you own. If you are unable to repay the loan, the car will be repossessed.

Fast Cash Advance Loan

A cash advance or payday loan might be useful to take care of an unexpected expense. Characteristics of these loans are:

  • You can qualify for them easily. Usually all you need are some paycheck stubs.

  • They have a short term life. You usually have to pay it back within two weeks.

  • The interest rates are very high.

Military Payday Loans

These loans are offered by military loan companies to assist qualified members of the armed forces in availing funds when needed. Some characteristics of these are:

  • It is specifically for member of the military.

  • It has a low rate of interest.

  • The borrower can choose a repayment schedule.

  • The money can be obtained even if the applicant has bad credit history.

No Credit Personal Loans

These loans have the following characteristics:

  • They are specifically designed for people with no credit history.

  • A credit check may not be required.

  • The interest rates may be high.

Second Chance Personal Loans

If you are dealing with an unforeseen financial crisis or a personal tragedy, you may be able to get a second chance personal loan. This can be a secured or unsecured loan and a collateral (home) may be required. A higher rate of interest will apply along with shorter repayment periods and limits on the amount that can be borrowed.

Christian Lending Personal Loans

Some Christian credit counselling organisations also offer debt consolidation loans. This is designed to get the person out of debt. Following are the characteristics:

  • You will work with a financial counsellor to total all your bills and negotiate with your creditors to obtain the lowest monthly payment option.

  • You only have to make one payment a month.

  • There are usually some flexible options and repayment plans available.

Festival Loans

This kind of personal loan is provided to help people to fulfill their own and their family’s wishes during the festive season. This is the best type of loan for those people who want to avail a small amount.

Marriage Loans

Nowadays, this type of personal loan is gaining popularity among the people of urban and rural sectors. The loan amount depends on various factors including age of the applicant, security pledged by the applicant (if it is a secured loan), repayment capacity of the applicant etc. Under the marriage loan, the rate of interest is governed by the prevailing market rate at the time of disbursal of the loan.

Key Points to be kept in mind before taking a Personal Loan

Following are the key things to consider before you take a personal loan:

Credit Score- Lenders constantly observe credit scores, debt to income ratios, income and the history of paying bills on time. The higher your credit score, the better are your chances.

Collateral- If you have something to secure your loan with—a home, a car or even a boat—it will be much easier to receive a personal loan.

Taxes- Interest on an unsecured personal loan is not tax deductible. If you want a deduction, a home equity loan or line of credit would work better for you.

Use-If you sense that this may just be a temporary fix and that there is a possibility of you being in a worse financial situation later, you may want to reconsider the personal loan.

Repayment funds- Make sure you have the income to repay the loan. Consider your job situation.

Source- Consider the source of your money, where will you get it from? You could check online or walk into a loan company, a bank, a credit union, a payday loan company or get a credit card for the personal loan.

Affordability- Some people take a new loan to pay off a previous one. Check the difference between the interest rates of the two before taking such a step. Such loans only make sense if the rate of interest is much lower or is fixed.

Rates and Terms- Check the current rates and loan terms. Even a small nudge in either direction in the rates can significantly impact a payment. The sooner you can repay the loan, the sooner you will get rid of the burden of the loan.

Compare Sources- All sources of loans are not equal. One bank may be offering special rates on loans than the other and your credit union may have better rates than a loan company. Conduct proper research and then avail your loan.



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