What is a Personal Loan?

A personal loan is a form of credit used by many consumers at some stage, to cover the likes of a new car, wedding or a family getaway.

It is a financial contract in which one party- the lender- agrees to give another party- the borrower- a specific amount of money, to be paid back monthly over a set period of time.

There will be interest payments as well as additional charges for the administration of the loan.

There are two main types of personal loans, namely: secured and unsecured loans.

Secured loans are backed by an asset, while unsecured loans are available to most people with a decent credit rating and are in employment.

Common reasons for applying for a personal loan:

It can be easier getting access to a personal loan compared to other types of financing. This can be especially helpful in the event of an emergency. These days various lenders, other than banks offer personal loans, so you have quite a few options from which to choose.

Getting a personal loan may be ideal for restructuring finance, so you only have to pay one monthly instalment instead of having to keep track of multiple debts.

A personal loan can be a great way to finance your expenses at a low cost, with the opportunity to repay the loan over a reasonable period of time.

What you need to know before taking out a personal loan:

Personal loans aren’t like credit cards, which are revolving loans. Getting access to a personal loan is different, as you’ll receive a lump sum upfront and then pay the money back (with interest) in regular monthly instalments.

Your credit score will determine your affordability and the loan amount you are granted.

Paying off your personal loan too early may result in extra fees.