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A personal loan is a kind of obligation or debt that is generally made
for family or domestic purposes. It is not meant for business, or for
long duration mortgage use. The financer lends money to the borrower,
and the borrower needs to return the full amount to the lender, but not
necessarily on a regular basis. It is an interest-based debenture loan.
It could be both a secured as well as an unsecured loan. If it is a
secured loan, the lender asks for collateral, whereas in the case of an
unsecured loan, there is no demand for any guarantors or added assets.
However, though lenders may not require guarantors, a few banks do ask
for them, along with collateral in the form of added assets. So,
apparently, there is no standard form of rules. Variations are
inevitable in case of terms and conditions as well as the eligibility
criteria, depending on the fundamental principles of lenders. You need
to scrutinize these in advance to avoid future complications.
Purpose of a Personal Loan
This loan can be used for any purpose, without any supervision over its
ultimate use. Usually, personal loans are used for high priced
incidentals like tuition fees related to school or college, furniture,
television sets, washing machines, cars, bikes and the like. Or, to
fulfill urgent financial needs, be it a grand function in the family or
a vacation and so forth. Such loans enable you to take care of a
variety of expenses like travel, medical, marriage, honeymoon and so on.
You must remember that the item that needs to be financed through a
personal loan should have a substantial life, at least as long as you
clear the debt. For example, an educational loan would certainly have a
lifetime value, so taking a hefty loan for it would be quite justified.
But if you need to take a car loan, and take around four years to repay
it, then the car should at least remain functional for that period of
time.
Types Of Personal Loan
Basically, there are three types of personal loans, namely, installment
loans, balloon loans and single payment loans. They are as follows:
- Installment Loan: These are loans in which you need to return the
amount of money borrowed, along with the interest, in monthly
installments over a pre- assigned time-period. This is the most popular
kind of loan and people generally opt for this kind of loan. Auto and
car loans come under the category of such loans.
- Balloon Loan: These loans require you to pay installments over a set
period of time along with a comparatively greater amount of money at
the term-end. You must ensure that your income level does not decrease
during the loan term so that you can afford to meet the ‘balloon’
amount in the end.
- Single payment Loan: This involves payment of the entire amount of
money taken as a loan, along with the interest rates, at a certain date
in the future.
Personal loans allow you to overcome an acute financial crisis, and
avert the necessity of mortgaging your home, jewelry or other such
prized possessions in order to meet your immediate fund requirements.
They help you to keep your family and your assets secure while
overcoming unavoidable circumstances, without suffering undue loss.
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