Personal loans

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Personal loans: Acquisition for personal use

Personal loans are consumer loans obtained by a person to be used typically for household purposes. These are loans commonly used for the sustenance of the family and the maintenance of certain household equipment such as the family home and its appliances.

At times, the income of both the spouses might not be able to cope with the monthly expenses of the family. Considering that their family grows, the needs of every member also grow; thus, the income that they earn must necessarily grow. Personal loans serve to bridge the gap between the insufficient income of households and its growing expenses.

Types of personal loans

Personal loans are classified into two types:
1. Secured loans
Secured loans are loans which have properties as its collateral. These are loans that give the lenders the assurance that the money they lent to their borrowers will be paid in the event the latter fail to pay.

Secured loans are the easiest to obtain because all that the borrower has to have is the property that will be used as security for the loan. However, these loans are also considered the riskiest because if the borrowers are not able to pay their obligations, they will lose not only the money but also the property that they used as collateral. As such, they must consider other available financing options before they resort to secured loans.

2. Unsecured loans
Unsecured loans are those which do not have properties used as collateral. These loans take interest rates as its security.

Unsecured loans are considered to be more convenient than secured loans, but its acquisition is more tedious than the latter because of the lack of a valuable security. While secured loans operate on the assurance that properties are available for claiming in the event the borrower defaults, unsecured loans operate on the premise that the loan will be paid after the lapse of a certain period of time, and if the borrower defaults, the whole balance will become due and demandable, and he will be liable to pay interest and other charges.




Difference on Amounts

The amounts associated with personal loans may vary depending on the type of loan obtained. If the loan is unsecured, the amount received is usually less than the amount to be paid at maturity because the principal amount already has interest and additional charges added to it. If the loan is secured, the amount received is equal to the amount to be paid at maturity because the property serves as a security for the loan.

Advice on Acquisition
In acquiring personal loans, a person must consider the following:

1. For secured personal loans, make sure to have sufficient collateral
A person must make sure that he has sufficient collateral to obtain the loan. For instance, if he intends to obtain a loan worth $250,000; he must have sufficient properties to cover more than, if not exactly, $250,000. This ensures that in the event the borrower fails to pay the loan, the lender will not be in a disadvantage of obtaining an amount which is less than the amount he lent.

Having sufficient collateral is critical to the success of obtaining these loans because this is the only consideration that the lenders will take to approve the request. Unlike credit cards which require an intense examination of the borrower’s records, these loans get away with the process.

Unsecured loans do not need to comply with the requirement on collateral because it is not a requisite before they are granted.

2. For both secured and unsecured personal loans, do not estimate amounts
In allocating funds from these loans, a person must not estimate the amounts for each expense or purchase. He must allocate the exact amount needed to pay bills or to buy commodity products.

Estimation, in this regard, is a dangerous habit that must be removed. Household expenses are specific as to time period and, as such, they must be settled according to their exact amounts. For instance, in terms of electricity and water bills, the money allocated must be based on the exact amount stated in the bill. Estimation may bring cash insufficiency to the household because they may have allocated a larger amount on some expenses.

3. Pay the loan as soon as cash is available
As soon as cash is available, the household must prioritize the payment of the proceeds of the loan. This is critical for unsecured loans because these loans are oftentimes charged with a high rate of interest. If the owner fails to pay it as soon as possible, or if he opts to wait for a longer time before he pays, interest charges will accrue, and it will be more difficult for him to pay the loan.

For secured loans, the interest rates are lower, but the greatest risk is losing the property secured in the event the borrower fails to pay it. As such, the importance of paying it as soon as money is available is indispensable.

4. Get a guarantor
A person may get a guarantor who will pay the loan in the event he fails to pay his obligation. Getting a guarantor, however, poses additional risks because if ever he ends up paying the financing company, he will be subrogated to the latter’s rights, and he can go after the borrower for reimbursement of the money he paid.

Personal loans – Conclusion

A family needs sustenance, and in the event the family income is not enough, personal loans are always available.