One of the main characteristics of personal loans is collateral not being required. "Collateral" means something of value, like a home, boat or car that the lender can repossess if you don't repay the account as agreed. Personal loans are backed only by your promise to repay, and for this reason they are also known as "signature loans" or "unsecured loans." This kind of financing usually (but not always) comes with a fixed interest rate and a term ranging from one to five years. Unsecured loan amounts vary, but most run between a minimum of $1,000 and a maximum of $100,000.

Qualifying for a Personal Loan

Because the lender must rely solely on the borrower's willingness to repay the loan as agreed, credit scoring is extremely important - it's widely believed that the way you've managed your obligations in the past is highly predictive of your performance when borrowing in the future.

The lender takes your application and verifies your income and debts. Your income and debt picture influences the amount the lender is willing to advance you and how long it is willing to lend the money. The lender also pulls a credit report, examines your scores and assigns you a credit grade.

Depending on your credit grade, loan amount and the length of time you wish to borrow, your personal loan rate will likely fall between six and 36 percent. Rates and terms vary considerably, so it's wise to shop a bit and obtain quotes from several competing lenders.

Personal Loan Uses

What can you use a personal loan for? Signature loans can be used for just about any purpose, from consolidating debt to funding investments or financing big-ticket purchases. Borrowers should compare personal loans to other types of financing - for example, if buying a car, secured auto financing is probably cheaper, and if funding an education, government-backed student loans might make more sense. However, unsecured loan interest rates are likely to be lower than those of credit cards, and personal loans can make budgeting easier with their fixed rates and unchanging payment schedule.

Conclusion

Personal loans are an extremely useful tool in certain circumstances, such as consolidating debt, financing big and necessary expenses and getting through an emergency situation. But it is important not to mistake personal loans for "free money" and underestimate the pressure you will find yourself under when the bills are due.
Take on personal loans with great hesitation, but once you're sure it's the right decision, shop assertively for the best terms available.