Financial institutions provide lending services to those individuals seeking capital. Often, individuals may run short of cash and resort to borrowing in order to obtain the required funds.
However, it is very important to have proper knowledge about loan-related details before applying for finance.
Potential loan seekers need to know how to apply for a loan online, the required documents, eligibility criteria, interest rates, and several other aspects while seeking funds. Besides, applicants also need to understand the various types of personal finance available in the market.
There are four factors which help classify personal loans. They are as follows:
Personal loans may be either classified as long-term or short-term loans. Every loan has to be repaid over a specific period of time known as the loan tenure. If the tenure of the loan is limited, it is known as a short-term loan. On the other hand, if the loan’s repayment period is spread over several years, it is known as a long-term loan. Preferably, borrow for a shorter period; while a longer term helps in keeping your payments manageable, it also indicates higher loan cost in the form of higher interest.
Personal loans are also categorized on the basis of the required collateral. If a loan requires assets to be kept as security, it is known as a secured loan. Loans that do not require collateral are unsecured or signature loans. Generally, personal loans are unsecured loans. This means that in the case of failure of payment, the lender cannot claim possession of the borrower’s assets. However, it is important to note that the interest rates for unsecured loans are comparatively higher as the associated risks are also high for the lender.
- Interest rates
Debt may either be fixed-rate loans or variable-rate loans. Loans having constant interest rates that do not change over the complete tenure of the loan are known as fixed-rate loans. Alternatively, variable-rate loans have interest rates that fluctuate over the loan period. These are often called adjustable loans because the interest rates tend to change with corresponding changes in the market rates.
- Amount repayment
Loans may also be classified as installment loans or single payment loans. Installment loans are usually repaid in the form of Equated Monthly Installments (EMI). Here, the borrower has to repay regularly over the term of the loan. However, the same is not so with single payment loans. Generally, such a loan is repaid with interest in one lump sum amount at the end of the loan term. This mode of finance is preferred by individuals who borrow small amounts.
There are numerous types of personal loans available in the finance market. Before applying for personal loans online, it is imperative to understand the benefits of each in order to decide the best option. It is advisable to either seek financial advice from an advisor or contact the lender’s representative to gain further knowledge. Doing your due diligence will go a long way in making a sound financial borrowing decision.