Written by Charlotte Wood (last updated February 21, 2009)
Sometimes the loan options out there don't exactly fit everything you're looking for in a loan. For whatever reason you need a significant amount of extra cash and you're not sure which way to go. One of your options could be a personal loan, but that is an option that needs to be approached with caution and discretion. Personal loans can get you into trouble and may not be worth it for that extra cash.
A personal loan is a much more open-ended loan; there's no specific purpose to it. There are secured personal loans and unsecured personal loans, the latter of which carries the higher interest rate. With an unsecured personal loan, there isn't any collateral being pledged against the loan. There's no way the lender is guaranteed your repayment. With a secured loan—like a home equity loan—the collateral lies in your house so that if you default then the lender repossesses your home. Because of this risk the bank takes on unsecured loans, the interest rates will be higher. This can be a problem because interest can often times hurt your account and you end up paying a significant amount more than you borrowed. I know it sounds obvious, but always find the lowest interest rate and if personal loans don't exactly fit into your budget then nix the idea for now.
As with any other kind of loan (including mortgages and credit cards) you need to shop around to find the best deal. Know what you want in your loan and go to different places and see who has the best offer. You don't need to borrow from a certain bank just because your checking account is there. Some banks offer better deals or packages when you take out a loan with them, but always make sure that's what best for your account.
Go into personal loans with a skilled degree of shrewdness; if you know your stuff and know what to expect out of a lender then you'll end up getting a better deal than if you just go in and say you need a personal loan. When considering a personal loan, don't take one out just so you can have a bit of extra cash to spend; do it for legitimate reasons and you might even want to consider talking to a financial counselor before you draw up the papers. Unsecured personal loans aren't necessarily bad, they're just risky and you never want to take too many risks with your money.
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