Personal Loans

Life can be a winding river that splits into smaller streams, and sometimes we hit a dam. In other words, we all sometimes need a little more money for the things we want or the things we have to sort out, and that’s just the nature of life. For some people, personal loans can be the key to getting over the obstacles of everyday life, with some extra money to make it happen. 

However, the word ‘loan’ can carry some weight for the average person, because it does imply that it needs to be paid back at some point. This could mean you don’t want to risk taking the loan because it may not be affordable to repay that debt in the near future, especially with varying interest rates. 

At National Capital, we want to help 1 million Kiwis become financially secure, so we aim to shed some more light on the basics of personal loans in this article. Hopefully, after reading through it, you will better understand the utility that these personal loans can offer you, and the implications they can bring too. 

What is a Personal Loan?

Simply put, a personal loan is an amount of money that people borrow for any number of reasons, including, but not limited to debt consolidation, renovating houses, and organising important events, such as a wedding. Depending on the person taking out a personal loan, these expenses might be prioritised differently, based on what they think is essential to cover financially at the time. 

Obviously, this loan is expected to be paid back by the lender, whether that is a bank, an online organisation, or a credit union. An important part to note about this repayment is that most personal loans, if not all of them, will have some kind of interest rate. This means that when you borrow money from a lender, you also pay money until the loan is repaid, as an incentive for the lender to participate in the loan agreement. 

What is Debt Consolidation?

We mentioned earlier that debt consolidation is one of the reasons that people may take out a personal loan, but what does that actually mean for you as a borrower? Debt consolidation refers to taking out a new loan to pay off other outstanding debts and combining them all into one loan with a more ideal repayment agreement for the borrower. Basically, if you have several different kinds of debts hanging over you, and there is a more favourable option of repayment available through debt consolidation, you can take out a new loan, and pay off all those outstanding debts under the same interest rates and terms. 

This is also a good option for lenders, as it usually results in the best chances of the borrower being able to pay off the loan, meaning no debt collection actions should have to be taken. However, it is essential that you know whether consolidating your debt into one loan would actually benefit you, or make your financial situation more complicated. To better understand your unique debt situation and the decisions you need to make, you should talk to a financial adviser or a credit relief company for the best advice for you. 

Using Personal Loans to Cover Home Renovations or Events

The costs of actually achieving home renovations can be pretty daunting for anyone buying a home that needs doing up, especially first-home buyers. In the same way, important events like weddings hold a lot of sentimental value for people, and so they are more likely to take out a loan to cover the costs involved. For both scenarios, the value you would gain from funding the process with a loan probably outweighs the amount of money you have to repay, which is why people tend to make this decision. As an example, taking out a loan to renovate a home could enable you to increase the overall value of the property should you ever choose to sell it.

What is a Secured Loan, and How Does it work?

A secured loan is a type of loan that involves the use of collateral as a way of securing the agreement between the lender and borrower. In everyday life, the most common secured loans you might know are mortgages and car loans, because, in these cases, the collateral involved is your house and your car. The main reason for secured loans to be used is to help ease tension on the lender’s end, because it gives them more of a reason to trust that some form of payment will be made back for the loan. If you cannot repay a secured loan, the lender may seize the collateral assets that you used to back the loan. 

Some of the different types of collateral you can back a secured loan with are real estate, stocks, insurance policies, vehicles, financial accounts, or any kinds of valuables too. Obviously, this adds more risk to a loan for the borrower than an unsecured loan does, and so you may want to heavily consider whether a secured loan is worth the chance of losing your collateral, especially when interest rates are still a part of the loan agreement. 

To Summarise…

In summary, personal loans can give you the money you need to pay for important events and investments, but they are also not free money. Because of this, it is essential that you understand your loan details, such as interest rates and repayment terms, so that you can feel confident you will be able to pay it back without consequences. For more significant investments, such as mortgages, you may be required to agree to a secured loan that includes collateral assets. These have higher risks for you as a borrower, and so they should be thoroughly considered before you agree to anything with a lender, or else you may lose valuable items or assets in the worst-case scenario that you can’t repay the loan. If you have any uncertainty about loans in general, you should contact a trusted financial advisor or seek more information from any lenders you intend to borrow from.