Personal loans are some of the most popular forms of credit for people looking to consolidate debt or pay for unexpected expenses. Simply put, a personal loan is any amount of money that one borrows to use for a variety of purposes. They differ from other forms of credit as there is no limitation on how one can use the amount borrowed.
Likewise, personal loans are ideal for people who wish to gain access to a lump sum of money to be used on various projects or expenses. The loan is usually cheaper than other loans, and one can borrow above their current account overdraft limit.
How They Work
Personal loans are a type of installment loans whereby people can borrow a fixed amount of money to pay back in monthly installments over an agreed period. The payment period usually ranges between 12 to 84 months.
Once a personal loan amount is paid in full, the account is closed, and if one needs more money can apply for a new loan. With personal loans, one can borrow between $1000 and $100,000. The amount that one qualifies for depends on one’s credit health as well as underlying needs
Terms to Remember
Principal: this is the initial amount of money that one borrows as part of the personal loan. For example, if you ask to borrow $2,000, then the principal amount is $2,000. The interest is usually calculated based on the principal owed. The principal amount decreases as one repays the principal loan.
Interest: This is the charge that a lender bills on issuing a loan. It is essentially a charge for holding and using the lender’s money. The interest is paid depending on the principal amount remaining on loan.
APR: The Annual percentage rate incorporates all the fees that one must pay for taking a loan. The charge includes the interest rate and any other lender fees. The rate is usually used to compare the affordability of different personal loans.
Term: This is the duration within which one is required to pay back the principal amount borrowed. Once a personal loan is issued, a lender will inform of the term of the offering.
Monthly payment: This is the amount of money that one must pay every month. The amount goes towards reducing the principal amount and catering for the total interest owed.
Types of Personal loans
There are basically two types of personal loans.
Unsecured Personal Loans: With this type, one must not furnish the lender with any form of security to secure a given loan amount. In this case, the loan is not backed by any collateral and sees lenders assuming all the risk of the borrower defaulting on the loan.
Secured Personal Loans: Are the most popular as they are backed by collateral such as savings account or property. If one cannot pay the loan amount in full, a lender typically has the right to claim the collateral as payment of the loan.
Where can you get personal loans?
Banks are known to be the first stop for people looking for secured or unsecured personal loans. However, they are not the only ones that offer these types of loans. Credit unions, as well as consumer finance companies and online lenders, also do offer these types of loans.
How Long Can I Borrow?
With personal loans, the repayment period varies. In most cases, the lender will offer the loan amount at a fixed rate to be paid over a fixed period of time. The payment period is usually detailed as part of the loan agreement in addition to the interest charged each month.
Some lenders allow people to pay back the loan amount in ten years, depending on the loan amount and interest charged.
How Much Do They Cost?
Personal loans tend to offer a good and cheap way of borrowing money, given that most of them come with some of the lowest interest charges. The loans tend to be cheaper; the more one borrows and pays. The APR charged depends on people’s credit scores, with those with the highest scores guaranteed the lowest charges.
In the U.S, the interest rates in Personal loans carry between 5% and 36% depending on the lender and borrower credit rating. The better the credit rating, the lower the interest rate one is guaranteed. The longer the loan terms, the more interest one is likely to pay.
In addition to interest, some lenders do charge some origination fees, which is essentially the cost of processing the loan. The origination fees can vary between 1% and 2%
Prepayment and Repayment penalties
Some lenders are known to inflict a charge on people who pay their personal loans in full before the end of the term. In most cases, it is not unusual to be charged one or two month’s interest. The charges are designed to cater to the fact that the lenders would be missing out on some of the interest that they would have earned in the long run.