A personal loan is one of the most common types of loans chosen by borrowers. Learning about what exactly its purpose is, how many types of personal loans there are, how you can avail one is essential to successfully acquiring one with favorable terms. There are a number of variables which need to be understood, and some of them, lenders may not explain if not asked about specifically. So, here we will inform you about everything there is to know about a personal loan, so you make a wise choice.
Definition of a Personal Loan
A personal loan, as you may guess by its name, is a type of loan which is offered for personal reasons. The borrower can utilize the loan for whatever use they want like buying a new vehicle, renovating their home, paying medical expenses, paying off a debt, organizing their perfect wedding, or whatever purpose they like.
Since it is not tied to any particular kind of expense, this type of loan is credited straight to the borrower, either in cash or in their account (often depending upon where it is being taken from, and the value).
A personal loan can be acquired from a variety of financial institutions like banks or credit unions, and even from private online lenders. However, online lenders can pose more risk, making it essential to choose wisely if you decide to take the loan from them.
Also read: When Are Personal Loans a Good Idea?
When borrowed from a proper financial institution, the personal loan can either be secured or unsecured. An unsecured loan means that you do not have to put anything as collateral in case of failure to repay back. In the case of private lenders, these loans are mostly unsecured.
An essential element to remember is that unsecured personal loans carry a higher rate of interest compared to secured loans. However, individuals who do not have the bandwidth to offer anything as collateral, may seek an unsecured loan as their only option.
These loans, like others can be repaid over a period of time, depending upon the repayment terms laid down in the loan contract. During the repayments, the interests have to be taken into account as well, and to avoid defaulting, borrowers must adhere to the terms of repayment strictly.
Types of Personal Loans
A personal loan is essentially of only two types: secured and unsecured.
A secured loan, as explained, requires some type of collateral. This could be anything such as a car, which acts as a physical asset; or a savings account which is classified as a cash asset. In case the borrower fails to pay the loan as per the terms of the contract, the lender can choose to keep the asset to fulfill the loan.
An unsecured loan requires no collateral, but tends to be riskier. Since there is nothing with the lender to hold on to till the loan is paid back, they are at a higher risk of loading money. As such, they can impose higher interest rates to gain as much back as possible. Additionally, a lot of banks and credit unions can refuse to offer unsecured loans in case they are not convinced of the borrower’s capability to return it back.
How to Get a Personal Loan
Getting a personal loan requires a methodical approach. The lending institutions often have a comprehensive approach, consisting of various steps in order to grant a loan. Prior to applying for one, it is advisable that the borrowers inquire about the general terms and policies for loans at the particular business.
This is essential because although some policies may be government regulated, there is a lot of scope for differentiation among institutions, making one better than the other for varied needs. It is also essential that borrowers inquire about all policies regarding interest rates, repayment policies, and more. Simply a slightly lower interest rate may not be the only factor you may want to consider.
Factors like flexibility in repayment terms, option for completing early repayment, and others can be very essential in ensuring that the overall terms are favorable.
For acquiring a loan, the following steps must be followed:
- Submitting an Application: The first step in acquiring a personal loan is submitting a filled application. While filling it, it is vital to ensure that you fill in all the necessary information which will likely include personal details, financial details, and more.
Some details which will be included are income history and status, credit score, any existing debts, and purpose of the loan. The borrower should fill these accurately. The borrower would also be required to present supporting documents such as income proof, account statements, etc. In case any additional documents are needed, the bank or lender will ask for the same.
- Background Checks: The next step will involve the lender checking all of the information that is provided by you. They will check your employment status, income sources, credit history, and more.
These checks will be used as parameters for assessing a candidate’s eligibility for the loan, as well as what interest rate the lender is willing to offer against the loan. This information would also enable them to judge whether a secured or unsecured loan can be offered and what repayment terms the institution is willing to offer the borrower.
- Loan Offer: After the assessments, the lender will draw up an offer letter, which will contain all the terms for loan approval. If the borrower is satisfied and chooses to avail the terms, the loan is approved, and the borrower needs to sign the contract approving the same.
- Disbursement and Repayment: Once the loan is approved, it is disbursed to the borrower in the decided manner. They can use it as they choose, and the repayment schedule kicks in accordingly. To avoid defaulting or losing the collateral (in case of a secured loan), they must stick to the repayment terms.
A personal loan offers many benefits, however, as with any loan, the borrowers need to be very vigilant and disciplined about repayments to avoid hampering their creditworthiness.
