Contrary to mortgage loans that are acquired against a property, in the instance of personal loans there is a fixed maximum sum against which one may withdraw money as and when required. There are several ways through which this amount may be withdrawn from a bank - by using cheques, telephone and the Internet banking systems. Basically there are two types of personal loans - secured and unsecured. In the instance of a secured personal loan, an individual needs to provide the bank with a security or guarantee to be able to borrow money. In the even of a borrower being unable to repay the loan amount along with the interest accrued on the principal, the lender (in this case it is the bank) is entitled to recover the money by using the security or collateral pledged to the bank.
Here, it may be mentioned that anything that has monetary as well as resale value can be pledged as a collateral or security. Hence, the pledged collateral may include T-bills, select, GICs, government bonds, specific Money Market funds and even real estate. Pledging real estate as collateral means securing a second mortgage and hence in addition to the already existing mortgage, this is an expense on your property. In personal loans, the rate of interest is linked to the principal amount and it is usually lower for customers seeking higher credits and when a property is pledged as a security for the credit. Normally, the interest rate is fixed at a simple two to three per cent of the principal annually. However, some personal loans require that the interest is paid on a monthly basis. Such loans offer the facility to completely redraw the maximum fixed amount and also the privilege to repay the entire loan amount at a time convenient to the borrower. Here is where the personal loans are different from the amortized mortgages or set repayment mortgage credits. In this case, the borrower is allowed to withdraw from the fixed maximum as long as he or she enjoys a good credit rating. Moreover, unlike in the instance of amortizing, the borrower is free to repay the full loan amount at any time without having to pay any monetary fine on the interest.
It is interesting to note that a personal loan includes many of the characteristics of both the line of credit as well as mortgage. As mentioned earlier, a personal loan can be both on a secured or unsecured and in the first case the borrower is required to provide a guarantee or security to the lender. Similar to a line of credit or the maximum credit amount that a borrower is entitled to, a personal loan is completely 'open' and the borrower is free to repay the credit at any time convenient to him or her without having to pay any fine on the interest. Again, like a mortgage, a personal loan includes a set payment, term as well as amortization schedule. In addition, the interest rate may be both fixed and floating depending on the maximum rate prevailing in the market at any point of time.
Depending on the specific purpose for which an unsecured personal loan has been obtained, the amortization period of the credit will fluctuate between five and 25 years, while the amortization period of a personal loan taken against a property may exceed 25 years. It may be noted here that the period of amortization is generally decided on the basic value and validity of the security pledged against the loan. Thus, it is very natural that a personal loan obtained to purchase a car will have a shorter amortization period as the value of the vehicle would lessen quickly. On the other hand, a personal loan sanctioned to purchase a home will have a relatively much longer amortization period as the value of the real estate is unlikely to diminish soon. Compared to mortgage credits, the cost of a personal loan is generally higher as the latter offers several advantages, including the amenability of making the complete refund at a time convenient to the borrower and that too without having to pay a fine on the accrued interest.
From the above deliberations and examples one is now able to comprehend what a mortgage loan means, the manner in which the loan is calculated or worked out and other related intricacies. It must be remembered that all types of mortgages comprise an amalgamation of several attributes, a number of choices for making payments and variable levels of amenableness. In brief, the amount lent is known as the principal that generates an interest. The interest is added to the principal amount and is the fee as well as security of the lender for allowing others to use his resources. The amount of interest varies depending on the lender and some times also on the agreement reached between the borrower and the creditor. It may be mentioned here that normally the Canadians are very meticulous in making regular mortgage payments to their lenders.
