Personal Loans 101: Understanding Personal Loans

Personal Loans 101: Understanding Personal Loans

Understanding Personal LoansPersonal loans are a great option because they provide simple terms, but it is important to understand the commitment you are making by entering into the agreement for the loan. The American Financial Services Association has produced an 8-page brochure that gives you a basic understanding of how personal loans work, a worksheet for calculating whether you can afford a loan, and the key terms to know.

The AFSA brochure gives you a series of questions to understand:

  • Is a personal loan right for me?
  • How do I know if I can afford a loan?
  • What happens when I apply for a loan?
  • What happens if I am late with a payment?
  • What terms of financing should I understand before taking out a loan?
  • Which laws exist to protect me?

By working through these questions before you enter into a loan, you will be better equipped to handle the loan and ultimately pay off the loan as planned. Also, the brochure provides borrowers with some of the key terms to know before entering into a loan:

Amount Financed – This is the total dollar amount of the credit that is provided to you as the borrower. This could be in the form of money paid to you, a credit line available to you, or financing for a purchase.

Annual Percentage Rate “APR” – This is a the measure of the cost of credit as calculated on an annual basis. We have another write-up entirely on understanding APR.

Finance Charge – This is the dollar amount you pay to use the credit.

Length of Term – Typically, personal loans have fixed monthly payments for a fixed term. This total number of scheduled payments or how long you have to pay the credit obligation.

Late Payment Fee – A fee that is charged when payment is made after your due date.

Monthly Payment Amount – The dollar amount due each month to repay the loan. Before entering into a personal loan, it is highly recommended that you make a budget. You need to determine if your monthly payment is affordable to you based on your monthly net income, your fixed monthly payments, and your disposable income requirements.

In any situation, make sure you work with a loan company that is willing to help you understand your loan before agreeing to the terms. Remember, it is always a good idea to ask questions before than after!

Click here to download Personal Loans 101: Understanding Personal Loans .