When it comes to loans, most are easily defined by their names: home loan, car loan, or business loan, for example. But what is a personal loan?
A personal loan allows you to borrow a lump sum of cash, which can be used for whatever you need. The loan isn’t secured by collateral, like a car or a house, so it can offer a great deal of flexibility in how it’s used. In fact, some people apply for personal loans for covering an array of different expenses, so they can consolidate those expenses into one sum.
To find out more about personal loans, we talked to Julie Strohfus, Vice President of Indirect Lending at Cobalt Credit Union:
Q: Why might people consider a personal loan?
A: They are used for a variety of reasons. We see people getting personal loans for things like debt consolidation, vacations, weddings, etc. This type of loan is really flexible and can be used to meet a lot of different needs.
Q: Are there any negative connotations that crop up when people think of personal loans? That they are synonymous with bad debt, for example?
A. Personal loans are considered unsecured debt like a credit card balance. Too much debt can be frowned upon. Any time you borrow money, whether it’s a personal loan or a mortgage, you need to consider how it fits into your overall financial situation.
Q. Based on credit history, what type of interest rates can people expect with personal loans?
A: Just like any other loan, rates are dependent on your credit rating, as you mention, so it’s important to make an effort to improve or maintain your score.
Q. What are some of the benefits of personal loans, especially compared with credit card advances and other ways to get money quickly?
A: Personal loans have a term on the loan that you pay off. That means you can’t keep adding to the loan like you can on a credit card.
Many people will pay down their credit card and then charge on it again. With a personal loan, there is an end, which keeps people out of debt. Because personal loans don’t have collateral to secure, applying and closing a personal loan is quick.
The bottom line
Ultimately, what is a personal loan? It’s a flexible loan that can be used for a variety of reasons. Whether it’s time for a new washing machine or wedding bells, a personal loan can help you cover unexpected and planned expenses. Just be sure to take stock of the larger financial picture and make sure the loan fits in.
Do you have questions to add? Share your thoughts in the comment section below!