Finances Explained: Personal Loans

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Personal loans go by many names and fit many needs. Unlike loans that are designated for specific purposes (e.g., auto loans and home loans), personal loans can finance anything from vacations to professional wardrobe expenses and debt consolidation. With such a wide range of purposes, how can you tell if a personal loan is the right fit for your financial needs? Let’s explore this type of loan.

What is a personal loan?

It’s more of a general loan. While auto loans are specifically for vehicles, personal loans don’t have a specific item that they finance. Rather, they help borrowers in need of different payment options for items that might not be as common as purchasing a vehicle, such as paying for a vacation, class ring or moving expenses.

How are they different?

Personal loans are not secured by collateral. This means that if a borrower falls behind on his or her loan payments, there is nothing to collect. Vehicles, for example, are used as collateral on auto loans. If payments are not made on an auto loan, the vehicle is repossessed. Because personal loans are not secured by collateral, they are often approved for smaller dollar amounts. Let’s say you are short of the necessary funds for moving expenses and are hesitant to take that money out of your emergency savings account. A personal loan could be the perfect option, offering small monthly payments that you could pay back in a shorter amount of time because the loan is not for a large amount.

Can you use personal loans instead of home or auto loans?

It depends. Because personal loan amounts are typically much smaller than the cost of a house or vehicle, they are not commonly used to purchase these big-ticket items. Additionally, personal loans often have higher interest rates due to the lack of collateral and the associated higher risk. That doesn’t mean you wouldn’t be able to finance home repairs or even purchase a used vehicle with a personal loan, but we do recommend performing a cost analysis before committing. For example: if you are purchasing a used vehicle for $5,000, you might consider opting for a personal loan. Even though the interest rate will likely be higher, you could opt for a more economical insurance option, whereas auto loans often require the addition of full coverage on a vehicle should any damages incur that would affect the value of the vehicle. Depending on the amount of interest that will accrue on the loan, it could be less than what you would have to pay in insurance fees.

As with any type of loan, it all boils down to you and your budget’s needs. Your local credit union would be happy to review these options with you and find what will serve you best financially.

 


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Deidre Davis

Deidre Davis is the Vice President of Marketing and Communications at MSU Federal Credit Union. MSUFCU's headquarters are at 3777 West Road East Lansing, MI 48823. Contact Deidre ad deidre.davis@msufcu.org or (517) 664-7877.