A personal loan is a loan provided to individuals to pay for purchased goods. At the same time, it is not a targeted loan, that is, the personal-finance company does not require specifying the loan purpose. Let’s look at the advantages and disadvantages of personal loans.
Pros and cons of personal loans
- minimum paperwork;
- fast approval and funding;
- the possibility of early repayment (often without any penalties);
- the ability to use the thing you purchased right away;
- guarantee from a rise in the price of items or services;
- the ability to pay in small installments without reducing your normal standard of living;
- no hidden payments (now loan companies are obliged to be transparent).
- rather high-interest rates;
- psychological dissatisfaction – when the pleasure of buying has lost its sharpness, and the loan payments have to be paid for quite a long time;
- overpayment over time can also cause regret about taking a loan;
- mandatory requirement of being a legal resident;
- age restrictions;
- the final cost of the product increases;
- financial liability to the lender (late payments cause fines and penalties, damage credit history).
Types of personal loans
To date, a personal loan is the most common service offered by local loan companies (such as Personal Loan Co).
This is probably the easiest way to get a loan for personal purposes in the shortest possible time by submitting a minimum set of documents. Naturally, this type of lending has both pros and cons, which are discussed below.
Many publications give their own classification of personal loans, such as car loans, mortgages, and payday loans. Below, we will review the most popular types of personal loans.
This type of loan can be classified into the following groups:
- by repayment method (annuity, one-time, individual). In practice, banks are more likely to use annuity payments, when the payment of the loan and interest occurs monthly with a fixed amount;
- by security method (collateral, surety). There is a dependence of the type of security on the loan amount. When increasing the size of the latter, the bank requires a guarantee or collateral (real estate or a vehicle);
- by loan terms. In personal lending, almost all banks set terms ranging from one to five years. However, the terms for secured loans can be extended to 10 years;
- by interest size. As a rule, annual rates can vary from 18% to 40%. It all depends on the bank: large banks usually put a lower rate than smaller ones;
- by loan purpose. Of course, the bank understands that a personal loan is mainly taken for personal needs, but if the loan amount is too high, banks require justification for the purpose of the loan. Accordingly, if the goal is to purchase motor vehicles or real estate, then a personal loan becomes a car loan or mortgage loan.
Common types of personal loans and their features
1. One-time personal loan
This is a very popular product. Almost any adult citizen can get it, and the amount depends on the solvency of the borrower. A distinctive feature of the loan is that it is provided and paid in one lump sum, not in installments. But the interest is repaid every month.
This type of loan is suitable for one-time not very expensive purchases since the repayment period is small – usually, it does not exceed 1.5-2 years.
The downsides are the short loan term and the fact that the lender is likely to charge an additional commission in case of early repayment.
2. Same-day payday loan
This is a universal multi-purpose loan for individuals, which allows the borrower not to specify the loan purpose and not to confirm how and on what the funds were spent. Funds can be given in cash or transferred to the bank account. No collateral or guarantors are required. These are the main advantages of a payday loan.
The disadvantages include high-interest rates, the need to prove you have a steady income, and a short loan term (usually 1-3 weeks).
3. Loan for the purchase of goods
This is a targeted loan taken to buy certain goods, and the contract for this type of loan is usually concluded directly in the shopping center or store, which in turn has a contract with the bank.
The advantage of such a loan is universal availability, speed of application and funding, often you do not need to provide collateral.
A conditional disadvantage can be considered that sometimes trade organizations require a small part of the payment (the first installment) in cash. Also, the loan term limit is usually small. The maximum loan amount depends on the loan term and the borrower’s solvency. Early repayment is usually subject to an additional fee.
4. Personal loan for paid services
This is another type of a targeted loan that covers a fairly large range of paid services. This can be educational, medical, repair, tourism, and other services and works. The entire range of services is provided at the same time, and payment is deferred. Most often the organization itself is engaged in the execution of such transactions as it concludes a corresponding agreement with the bank. The loan is targeted, which requires mandatory confirmation.
It is possible to have a co-borrower (for example, parents of a minor who conclude a contract for the provision of educational services for their child).
A conditional disadvantage is that usually the first payment must be made in cash (most often it does not exceed 10% of the entire amount) and this payment must be documented. If you want to make an early repayment, most likely you will have to pay a commission.
You can also suspend payments by agreement for a period of 3-6 months (this does not apply to interest). There are loans that require collateral and there are those that are provided without collateral.
5. Trust loan
These are special banking programs that apply to bona fide borrowers who have previously confirmed their reliability by timely full payments of debts on loans in this particular bank.
The advantages of such programs are lower loan rates, payment in installments, fast approval. Another advantage is that securing such a loan is basically not required. The undeniable advantage of the product is the absence of commission for early repayment.
The disadvantages are a relatively small loan amount (usually a few thousand dollars) and short repayment periods (on average from 1 year to 1,5 years).
Such a loan is good for buying travel packages, inexpensive things, paying for repairs, etc.
6. Target and universal loan for young families
Another category of special banking programs is designed for young families (people under 30 years who are legally married) or for single-parent families. Loans can be targeted or not.
The advantages are the favorable loan terms. Targeted real estate loans for young families can are large, which means that the first payment can be less than10%. The next thing is low-interest rates. You can request referred payments of up to 5 years and extend a lending period. The period varies between 3-20 years.
The disadvantages are long approval and some paperwork. As soon as you get funds, the lender charges a one-time commission (about three to five percent).
7. Pensioners’ loan
This type of lending is provided specifically for working pensioners. It is multi-purpose and is provided in parts or in one sum, in cash or to a bank account.
The downside may be a possible age limit on the payment terms: that is, when the debtor reaches a certain age (for example, 75 years), the loan must be repaid. Usually, these loans are provided for a short period, and the percentage rate ranges from 20%.
8. Pawnshop loan
This is a personal loan that requires collateral. The peculiarity of this banking product is that the lender’s decision does not depend on the solvency of the borrower since it is confirmed by documents on the ownership of some material values that act as collateral. This can be jewelry, precious metal ingots, securities, cars. The largest loan amount does not exceed 70-90% of the estimated value of the collateral.
The advantages of a pawnshop loan are lower interest rate, quick approval.
The disadvantages are a short repayment period (usually not exceeding 1 year. The debt is paid in a lump sum upon on the due date specified in the contract.