Understanding Personal Loans

A personal loan is a money that a person borrows from a bank or credit institution to pay for certain purchases. As a rule, the purpose of a personal loan is to pay for a variety of goods and services, including various household and electronic appliances, training, vacation, treatment, wedding, etc.

Of course, the use of credit funds will not be free: the bank will determine the interest rate at which the cost of the loan for the borrower will be calculated.

In general, the concept of “personal loan” includes all loans, the purpose of which is to satisfy any need of the borrower. For example, such loans include a loan for the purchase of a car (car loan), for the purchase of housing (mortgage), quick loans, cash loans, and others.

In this year, people mostly apply for personal loans to purchase refrigerators, TVs, mobile phones and other not too expensive goods, according to the finance terms 101.

What are the types of personal loans?

Personal loans are divided into 2 types by their targeted nature: targeted and non-targeted. Targeted loans are usually provided at the place of purchase of goods (in a store). A non-targeted loan is issued directly at the lender’s location.

Moreover, personal loans can be secured (collateral required) and unsecured.

Depending on the speed of approval and funding, personal loans are divided into express loans (approval within 15 minutes to 1 hour) and the so-called “classic” personal loans (approval within 2-14 days). There are other classifications of personal loans. We have mentioned the main types only.

Who is eligible for a personal loan?

A personal loan can be provided to an individual who meets the eligibility requirements set by the lender. Depending on the lender, these requirements may vary, but there are some universal requirements: an individual must be a US citizen or legal resident, be at least 18 years old, have a permanent source of income and a valid bank account. The main source of income for most borrowers is wages. However, there are lenders that provide loans to non-working pensioners and even students. There are other sources of income: dividends from securities, income from renting out real estate, etc. Banks generally take into account other sources of income only if there is a permanent source of income in the form of wages. Alternative sources of income must be documented.

Tips for finding your best personal loan

Below are some tips you should pay attention to when getting a personal loan.

Calculate your own strength

Before making the final decision to take a loan, you need to make sure that this loan will not become a burden on the family budget. As a rule, lenders approve a loan application if the monthly payment does not exceed 40-50% of the borrower’s income. It is optimal if you give the bank no more than 20-25% of your income per month.

Contact different lenders in parallel

Apply to multiple lenders at once or use a loan referral service. This will significantly increase your chances of getting a loan. If different banks make a positive decision, you can choose the best conditions.

Provide the correct information

When applying for a loan, report your real income. Fill out the questionnaire very carefully and legibly: even an incorrectly specified house number can result in a loan rejection.

The lender must be able to reach you by phone

When filling out a loan application, you will have to indicate your work and home phone numbers. If it turns out that it is impossible to reach you by phone after a few calls, you will most likely be denied a loan.

Card credit is cheaper and more convenient

If you need to buy household appliances or furniture on credit, get a credit card from the bank and pay for the purchase using it. Card loans are significantly cheaper than fast personal loans. In addition, you will be able to use the credit card during the entire period of its validity (usually two to three years). It is better to apply for a card at a bank that provides a grace period for credit cards, during which you will use the loan for free (usually it does not exceed 50 days).

Save on interest

The higher the amount you deposit as a down payment and the shorter the loan term, the lower the rate will be. In addition, a loan is often cheaper if you can officially confirm all of your income.

A car loan with insurance is better

When receiving a targeted personal loan for the purchase of a car, you will have to buy insurance (against theft and damage). You can avoid buying an insurance policy by taking a non-targeted loan for urgent needs: the lender will give you cash or transfer money to your account. You will neither have to report where you spent this amount nor insure the purchased car. However, the cost of this loan is significantly higher than the car loan. It even turns out that a car loan with a comprehensive insurance policy is cheaper than a non-targeted loan without insurance.

You will have to return the debt

After you sign the loan agreement, you have no way back: within the agreed period, you are obliged to pay off the debt and pay interest. If you do not make the next monthly payment by the date specified in the agreement, the bank will punish you with a fine. Typically, when the overdue period exceeds one month, the lender requires early repayment of the debt. First, they will try to negotiate with you peacefully: with the help of calls and, possibly, personal meetings. If negotiations fail, the bank will go to court. However, if you cannot repay the debt on time for a good reason (for example, you lost your job or fell ill) and convince the bank of this, it can meet you halfway: you will be given a deferral for some time (usually no more than three months), and no penalties will be charged.

Beware of fraudsters

Do not agree to take a loan in your own name for a third party. Fraudsters often use the gullibility of citizens: for a certain reward, they offer to get a loan and give them money or goods bought on credit. At the same time, they convince you that you will not have to repay the debt. However, the bank will make claims to you since you will be the borrower according to the documents.