There are times when we find ourselves in a situation when we need extra cash for some of our spending. These maybe for car or household repairs, emergency medical expenses, or even debt consolidation. These types of spending may be addressed by a personal loan.
Personal loans are unsecured loans where the borrower is given a certain amount by the lender and is paid over the loan term with a specified amortization amount. These amortization payments include interest rates that are considered “rent” payment for the use of the lenders money. A personal loan does not require any collateral to support the loan and does not need to be used on a specific purpose.
A personal loan is considered to be an unsecured loan. Most lenders do not require any collateral for a personal loan and because of this, most financial institutions who grant personal loans charge a higher interest rate compared to other types of loans that are secured. The reason behind this is that the lender will try to recover the principal loan amount in the fastest time possible to minimize the risk of loss from lending the money. Interest rates, financial charges, and other penalty fees are often high. This is why it is necessary to consider the interest rate when you decide to avail of a personal loan.
Unsecured loans are riskier for the lender. The best a lender can do is find a guarantor who will also be liable to your loan under the same conditions as yours.
It is not the lender’s choice on how you will use the proceeds of your loan. For the lender, they will consider it as a multi-purpose loan. All the money lender can do is check where you plan to use the proceeds but may not hold you to it. It will always be the borrower’s prerogative on where the proceeds of the loan will be used.
Being a multi-purpose loan, it is essential that you stick to the plans on where you will be using your money. Losing discipline may mean using the proceeds of the money for other stuff that are not really needed.