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What Is a Personal Loan?

A personal loan is a kind of unsecured loan which can be used for any purpose that the borrower deems necessary. An unsecured loan is an umbrella term used for loans which do not require collateral. Banks, credit unions, and other financial institutions offer personal loans on an ongoing basis.

There are two kinds of personal loans: closed-ended personal loans and personal lines of credit. A closed-ended personal loan is the usual option and the type that most people recognize. It works in the conventional manner of borrowing; that is, an individual applies for a certain amount, and if the personal loan is approved, receives the amount. He then pays of the loan within a specified period of time. Of course, the total sum of the loan is higher than the principal amount as interest is tacked on.

The other type of loan is the personal line of credit. As opposed to a closed-ended loan, a personal line of credit is an ongoing set up. The borrower can access the funds whenever he has the need to do so and repay them whenever he can. The effect is that as long as there are enough funds, the borrower can take out the money. This is more convenient than the closed-ended loan, but it can easily turn into a debt trap if not managed properly.

Personal loans are not restricted in terms of how the money is used. They can be used for anything from a holiday to a relatively huge purchase to paying off other urgent bills.

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