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. 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 about them.
Personal loans are unsecured.
That means the loan doesn't require you to use an asset as collateral. So, 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 the primary reason that personal loans are more difficult to get. The lender doesn't have any asset to seize if you decide 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. This includes reporting late payments to the credit bureaus, hiring a collection agency, and filing a lawsuit against you.
Personal loans have a fixed amount.
The amount of personal loans ranges anywhere from $1,000 to $50,000 and depends on your credit rating. The better your credit score, the more money you can borrow for a personal loans. Some banks have a low cap on the amount of personal loan you can borrow. For example, you may be able to borrow only a maximum of $10,000 personal loan. You may be able to take out higher loan amounts at a bank you already have a relationship with.
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. The better your credit score, 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.
Personal loans 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. There may be a penalty for paying your loan off 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're 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.