Loan Basics — Personal and Installment Loans

Personal and Installment Loans

We all need a little extra money from time to time. You might find yourself facing unexpected medical bills, or maybe you wish to consolidate several of your outstanding debts into one loan (and one loan payment).

If you need extra funds to cover an important expense like this in the short term—and if you have good credit—you may want to consider getting a personal loan or opening a personal line of credit.

As with any other kind of loan, consider:

• How the purchase fits with your financial priorities and goals
• Whether or not the purchase could be postponed while you continue saving
• Whether the monthly payments will be affordable

Personal loans

A personal loan (also known as a ‘signature loan’) is an unsecured loan, which means you do not have to use your property as collateral. Generally, personal loans are only given to borrowers with very high credit scores.

The interest rates for unsecured loans are often very high, usually higher than the interest rate for a HELOC (which is a type of personal loan that is secured by your home). Because of the high interest rates associated with personal loans, they are best used for expenses that you intend to pay off quickly.

Most personal loans are set up as installment loans, which means you repay the loan over time, with a set number of scheduled, fixed payments (usually monthly). Most people who take out personal loans plan to pay them back in 12–18 months.

A personal loan can be used to help with things, such as:

• Consolidating your debt into one loan
• Paying for education
• Making home improvements
• Paying medical bills

Personal lines of credit

A personal line of credit can give you fast access to a set amount of money (usually limited to $5,000 or $10,000) which you can borrow and pay back as needed. As you repay the funds you borrowed, you can then borrow them again and again from your line of credit without having to apply for new loans every time.

You are only charged interest on the amount of money you have borrowed from your line of credit, not on the money left in it. It’s important to note that personal lines of credit often have high interest rates and, as with personal loans, banks are more likely to approve borrowers with very good credit and proven earnings.

If you get a personal line of credit, you can usually access the funds via check, an ATM card, and Internet transfers to other bank accounts. Remember that interest starts accumulating as soon as you withdraw the money.

Many banks and credit card companies offer personal loans and lines of credit, so it pays to shop around and compare interest rates and terms.

Debt consolidation

One of the most common uses for a personal loan is to consolidate other debts into a single loan. For someone who is feeling overwhelmed with several high-interest loan payments every month, it can be a huge relief to combine them all into one monthly payment. And, consolidating your debt could help you save interest and get out of debt faster.

If you are thinking about consolidating your debts into a personal loan, shop carefully to find the lowest interest rate available. Interest rates on personal loans can vary, and typically range anywhere from 6 percent to 25 percent depending on your credit history. It doesn’t necessarily pay to consolidate your debts if the new loan has a much higher interest rate than you are already paying.

A debt consolidation calculator can help you figure out whether it makes sense to pool all of your debts into one loan.