How Do Personal Loans Work?
A personal loan is debt. It’s money someone borrows to pay for just about anything. Some of the most common reasons people take out loans are for weddings, vacations, major appliances, or to cover emergencies. Whatever the reason for a personal loan, the fact remains that it’s going to cost more to buy what you want because you will also have to pay interest on the amount you borrow.
People like personal loans because they receive cash now to buy something they can’t afford. If you are wise, though, you don’t buy things you can’t afford. The debt industry in America, and around the world, has done an incredible job of teaching us that the opposite is best, though: that you can buy something you can’t afford. In fact, you should. You deserve it! Issuers of debt don’t want you to ask if you can afford something you want, only if you can afford the payments to borrow for what you want.
There are many forms of debt that are not classified as personal loans. Those include revolving lines of credit like credit cards, mortgages – which are only for property, and auto loans – which are for automobiles. But within the category of personal loans, there are many subcategories. This includes unsecured loans: these don’t require you to risk anything as collateral to secure the loan. They include secured loans: these do require collateral, something the lender can take from you if you fail to pay back the loan on their terms. That could be a boat, a car, jewelry, or something else. Installment loans are paid (normally) monthly until the debt is paid off. The lender will set you up with a schedule of payments so you know how much you have to pay back in minimum each period and what that period of time is (again, it’s usually monthly).
The bad news about loans is that you have to pay interest on the balance continually until it’s paid off. So each period (month) that goes buy adds new charges that have nothing to do with what your purchase is really worth. You could use a loan to buy a boat, and the boat could sink, but you’d still have to pay off the loan…with interest! Avoiding loans is a smart way to hang onto your money and not pay more for things than what they are really worth. Keeping away from debt all together is the best way to grow your money instead of handing it over to someone else each month.
If you’d like help paying off your loans and other debt so you can get on track to build your wealth instead of sacrificing it, get scheduled with a financial coach today.
