Personal loans are unsecured loans which people can use for a variety of purposes, such as paying tax bills, covering school tuition, or making car repairs. Many banks and other lenders offer personal loans to people with good credit records who can demonstrate an ability to repay them. Usually, personal loans are unsecured, which means that borrowers do not need to back their loans with assets such as their homes. For people who have limited assets, the unsecured nature of a personal loan can be a tempting feature, because it means that they can access money which might otherwise be out of reach. Because they are unsecured, on the other hand, personal loans tend to have a slightly elevated interest rate, reflecting the increased risk to the lender. There are two types of personal loans. A closed-end loan is a onetime loan of a set amount, with a fixed rate and repayment schedule.
A personal line of credit operates like other lines of credit, with a set limit and a turning balance. People can use personal lines of credit in a variety of ways, and repay them at their leisure. Personal lines of credit offer more flexibility than personal loans, but if people do not manage them responsibly, they can turn into a problematic debt. In the case of a closed-end loan, potential borrowers should ask about loan origination fees and the interest rate, and they should determine whether or not the interest rate is fixed, how much the monthly payments will be, and how long it will take to repay the loan. Offers of personal lines of credit should be evaluated to determine whether the interest rate is favorable, and how high the limit will be.
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