Personal Term Loans

Personal Loans  Term Loans  

Getting to Know Personal Term Loans

Among the wide variety of types of credit offered to individual borrowers are personal term loans. Personal loans are different from auto loans, mortgages and lines of credit in several ways. And unlike equipment loans and working capital loans, they are suited for individuals rather than businesses. However, they do have similarities with other types of credit, which will be covered in this article.

Most people find themselves in circumstances at one time or another in which a personal term loan can be the exact solution for their needs. Reasons can range from not having enough cash to cover the situation or the borrower does not want to tap into their savings. Like all credit, performing due diligence will avoid costly mistakes down the line.


The subjects about personal term loans in this article are:

  1. Term loans defined
  2. Reasons people prefer term loans
  3. When term loans should be avoided
  4. Bad credit term loans
  5. Other personal financing options


Term Loans Defined

Basically, a term loan is a specific amount of money borrowed from a bank or other financial institution that is repaid on a pre-determined schedule and within a certain timeframe (term). Either fixed or adjustable interest is charged on the amount that Is borrowed, depending on the lender.

Usually, term loans last between one year up to ten years for individuals. Most term loans are paid in even amounts. This method makes it easier for the borrower to budget their expenses each month. But in some cases, repayment is made in gradually increasing amounts during the loan period. This method of payment potentially saves interest over the life of the loan, and pays the loan off sooner.

Once all of the money, plus interest, is paid in full (usually at the end of the term), the financial obligation ends. If more money is needed later, the borrower is free to apply for term loans or other personal financing.


Reasons People Prefer Term Loans

People choose term loans over credit such as second mortgages or home equity loans because there are no appraisal or origination fees associated with term loans. Other reasons borrowers find term loans beneficial include:

  • No collateral is required
  • Term loans with banks offer discounts for automatic debit payments
  • The cost of term loans is cheaper than other financing
  • Term loans often offer more flexibility in terms of repayment and interest

Term loans are also preferred by people who do not want to maximize their credit card limit, but need extra money for an unexpected expense. They are also used to pay for a purchase, rather than having an open line of revolving credit.


When Term Loans Should Be Avoided

Handling credit responsibility should be the first consideration whether applying for a term loan or any other type of credit. Since so many credit products are available, borrowers should consider whether a term loan is the right choice for what they are trying to accomplish. Term loans might not be the answer for borrowers in the following situations:

  • The only term loan they are offered uses compound interest. This type of financing means the lender will periodically add interest to the amount borrowed, which means the interest increases the longer the term lasts.
  • The lender charges a high pre-payment penalty. Borrowers should have the option to pay off debt early in the event they get a windfall or other unexpected funds.
  • The requirement for approval is an extremely long repayment period not proportionate with the amount borrowed. For instance, a $500 loan with a 5-year repayment term. This is a sign that the lender is attempting to get more interest.


Bad Credit Term Loans

People with bad credit can also find lenders that offer term loans. Usually, these are short term loans that are used to solve an unexpected financial problem. The loan is paid back quickly, often within a few weeks. Repayment is most always made through bank account debit.

Short term loans applications are available online. They are similar to traditional loan application with regard to information and documentation. Once the lender and borrower agree on the amount, terms, and fees, the loan is approved. Rather than receive a check, the proceeds are deposited into the borrower’s bank account.

Short term loans are designed for lower amounts, commonly no more than $1,000. These are term loans that charge high fees and interest, but have helped many borrowers quickly fix an unexpected financial emergency.


Other Personal Financing Options

There are other options for people who find themselves in a financial pinch. Depending on how much money they need, they might get loans from friends and family or get cash advances on their credit cards. Other financing options may mean getting second mortgages, or pay day loans.

With the high interest, fees, and credit risks involved in getting term loans, credit cards, and other financing, many people have chosen alternative means to get extra cash they need including:

  • Some employers will advance money to their employees without fees or interest until the next payday.
  • Selling unwanted personal items
  • Withdrawing from an emergency fund
  • Saving to pay cash for a purchase
  • Renegotiate repayment terms with creditors to free up money each month


There are definitely situations where the only option is to apply for term loans. In these situations, the wise thing for the borrower to do is take special care when it comes to choosing lenders. Shopping for interest and repayment terms that are the right fit can not only solve the financial problem, but help improve the credit of the borrower.


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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.