What is a Personal Loan?

Personal loans are debts taken on by individual consumers. They can range in size, dimension, terms, and conditions widely. One of the most common large types of personal loan is a mortgage. This is an arrangement by which an individual borrows money from a bank or large institution to afford a home. Homebuyers may also sign up for other relevant personal loans, such as home equity loans (using the money you've “stored up” in your house to pay down consumer debt, for instance) and second mortgage refinance loans (using equity to get a better term on your first mortgage loan.)

You can also find smaller scale personal loans, such as so-called bad credit or unsecured arrangements. These smaller, more “high risk” initiatives often charge very high interest rates and demand repayment within a very short period of time, two weeks or less, for some unsecured personal loans.

Other so-called “personal loans” are known by different names. When you lease a car, for instance, you engage in a loan arrangement with the manufacturer's leasing company. When you buy an expensive piece of stereo or TV equipment on a payment plan, you're in a sense taking out a personal loan from the merchant.

How do businesses which dole out personal loans make money from consumers? Simple, companies charge what's known as interest for the privilege of lending money. Basically you're charged a percentage of the balance of the loan, and this percentage may vary based on your credit history, the amount of money you're borrowing, the national interest rates, and the whims and terms set forth by the lender.

Moreover, you can find fixed rate personal loans (arrangements in which the interest rate remains the same for the lifetime of the loan) as well as variable rate personal loans -- arrangements in which the interest rate can change due to changes in the balance, credit trouble, or even good behavior. So-called “secured” personal loans are debts supported by collateral -- in other words, if you default on the debt obligation, your creditor can in certain circumstances seize your collateral as an apportionment of repayment.