How Does a Personal Loan Work
When entering the adult world and facing challenges while building the path to the long life dreams, somehow, there are unavoidable trouble that comes along the road.
And talking about adult life and this modern life, it’s the financial troubles that are commonly appears.
Sometimes, no matter how many strategies have been made, but the choice fall down to nothing more than to get money as easy and as quick as it can, and making personal loans is the answer.
Basically, a personal loan is an amount of money that you, as the borrower, borrow from a financial institution, an organization, or another individual, and promised to be paid in a certain period of time, with or without additional fee that comes from interest rate.
Type of Personal Loans
In a broad sense to understand what is personal loan and how do personal loans work, you have to understand the different types of it.
Overall, there are two types of personal loans, the secured loan, and the unsecured loan.
The secured loan is the debt you get to make, usually from a financial institution like a bank, but involving an asset of yours as the warranty.
The value of the asset must be the same or exceed the value of the debt you made.
And as the collateral, losing the asset would become your main risk if you don’t get to fulfill the repayments of the debt.
As the opposite, the unsecured loan does not demand any collateral or warranty from the borrower when the loan is made.
Yet even though it does not impose any asset as the guarantee, the lender would still paying attention to the borrower’s credit history.
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Because less paperwork on collateral is needed, the process of getting the debt would be far faster and easier in an unsecured loan, although usually the limit of the debt that can be lend is smaller.
And because the lender would have higher risks in an unsecured loan, the interest rates that are imposed on the loan would be much bigger, not to mention any other additional fees that might concurred.
If a failure on payment is happened, this would result as a bad note in the borrower’s credit history, which could affect the borrower’s future credit application, mortgage application, or any other loan applications.
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Between The Factors
It is actually really simple to understand how do personal loans work; there’s the risk, and there’s the cash, and both of these is working in parallel lines.
The higher the risks, the higher the cash will be. The higher the risks the lender got in the loan, then the higher the amount of cash you will have to pay to the lender. In the secured loans, you would have to place your assets as collateral, but in return you can get higher loan, longer period of payment time, and lower interest rates.
On the contrary, the unsecured loans could be a great help when you need fast money and don’t have the time to deal with vehicles or mortgage paperwork, but in the other hand there are the high interest rates as your own risk to take.
Source: Personal finance articles