Knowledge they say is power, so ignorance in banking should never be encouraged as it might lead to costly financial expenses.
Personal loans are one of many types of loans you can borrow from a bank. These loans are typically general purpose loans that you can use at your discretion for things like consolidating debt or paying for an unexpected expense or small home improvement project.
Personal loans are often more difficult to get and have strict qualification requirements. If you’re thinking about borrowing a personal loan, here are some things you know, according to thebalance.com.
Personal loans are unsecured
This means the loan doesn’t require you to use an asset as collateral. If you default on a personal loan, the lender can’t automatically take a piece of your property as payment for the loan. This is one of the reasons personal loans are more difficult to get. The lender doesn’t have any asset to seize if you can’t make loan payments anymore. Even though the lender can’t automatically take your house or car, it can take other collection actions.
Personal loans have a fixed amount
The amount of personal loans depends on the lender, your income, and your credit rating. The better your credit score and higher your income, the more money you can borrow. Some banks have a cap on the amount of personal loan you can borrow.
Once you pay off the loan, the account is closed. If you need to borrow again, you’ll have to reapply.
Personal loans usually have fixed interest rates
The interest rate is locked and doesn’t change for the life of the loan. Like the loan amount, interest rates on personal loans are based on credit rating. Generally, the better your credit rating, the lower your interest rate. Lower interest rates are ideal because it means you pay a lower cost for borrowing the loan. Some personal loans come with a variable interest rate that changes periodically. The drawback of a variable interest rate is that your payments can fluctuate as your rate changes, making it harder to budget for your loan payments.
Personal loans have a fixed repayment period
You have a set period of time to repay your personal loan. Loan periods are stated in months, e.g. 12, 24, 36, 48, and 60. Longer repayment periods lower your monthly loan repayment but they also mean you pay more in interest than if you had a shorter repayment period. Your interest rate may also be tied to your repayment period.
For example, you may have a lower interest rate with shorter repayment periods. Longer repayment periods also mean you will be paying on the loan for a longer period of time.
Having an open loan can affect your ability to get approved for other loans. Note that some loans have a pre-payment penalty, which charges a fee for paying off your loan early.
Applying for a personal loan
It may be easier to get a personal loan from a bank you already have an account with. The bank will probably want to know what you are going to use the money for and may even have a better loan for your needs. As with any other loan, it’s important to choose personal loans wisely and only borrow what you can afford to repay.