| | - As the name implies, a personal loan is a borrowing arrangement between a financial institution and an individual. Usually for this type of a loan the lender does not require any “security” or “collateral” to be provided by the borrower as a condition for obtaining the funds. Personal loans are also known as unsecured loans for this reason. They are typically provided for relatively small sums of money from £500 to £25000.
- Personal loans are seen by the financial community as being “higher risk” than other types of borrowing. This is because if the borrower should default (that’s to say be unable to meet the agreed repayment schedule), the lending institute has no easy claim on any of the borrower’s property and may need to go to court to get a judgment to ensure (at least partial) repayment. As a consequence of this, a personal loan will usually attract a higher rate of interest in comparison with other types of borrowing arrangement. Furthermore, the lender may wish to take a close look at the borrower’s credit history and will adjust the interest upwards if it is poor.
- Since there is a higher level of risk associated with this type of loan, the maximum amount that can be borrowed tends (in the UK, at least) to be restricted to £25000. This, of course, means that the financial institution’s risk is somewhat restricted. An additional strategy for financial institutions to reduce their risk would be to limit new consolidation loans to those customers who have a higher income and a good credit rating. The downside of this policy is that the financial institution will be granting fewer loans in total and consequently will see a lower overall profit margin. The purpose of these actions is to minimise the risk that the financial institution is exposed to, particularly in times when very few of us are certain about the security of our jobs.
- It is likely that as a consequence of the current world financial crisis that personal loans may become harder to come by or the maximum amount that can be borrowed may be reduced. Indeed, Moneyback Bank in the UK announced that it would no longer accept applications for personal loans in November 2008. It is surely ironic that, in the face of a global financial crisis that largely stems from a loss of confidence about and within the financial sector, financial institutions have become much more cautious about lending money to members of the general public.
- Lending money is at the very heart of banking sector activities and it is only through the granting of new loans that the global recession that the world is experiencing will be brought to an end. The recession was largely triggered by the so-called sub-prime lending crisis in which major financial institutions lent money to individuals that were ultimately unable to repay their debt. At the moment, the financial sector seems to be in a “once bitten, twice shy” mindset. Confidence will return to the sector, but the system has had a nasty shock and it will take some time before the money supply recovers.
- A personal loan may be the best solution for some people, depending on their individual circumstances. Such loans can be used for an extremely wide range of purposes from consolidating other types of debts, buying a new car or a kitchen or perhaps a much needed holiday. Like all other forms of borrowing, the interest charged for a personal loan will vary between banks and other financial institutions for essentially the same product (loan amount, term etc.) In case you are interested in taking out a personal loan, you should probably take some time and compare deals.
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