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Personal loans are general purpose loans to be used as you see fit. They are monies borrowed from a bank, a personal investor, or a financial institution.
Since these loans are not easy to get because you have to meet many strict qualifications, here are five things you should know about these loans.
A personal loan usually has five distinct characteristics:
- It is an unsecured loan
- It is of a fixed amount.
- It usually has fixed interest rates.
- It has a fixed repayment schedule.
- It is not easy to get.
Let us look at these factors in more detail:
1. Unsecured loan.
Since these loans are unsecured, you don’t need to offer any collateral, like a house or car, or some other valuable property, to get this loan.
This puts the burden on the lender who has no resort to take if you default on the loan. The lender cannot seize one of your assets and sell it to recover the loss. This is why obtaining personal loans is difficult.
However, the lender can still exert pressure on you to repay the loan should you default, including reporting you to the credit agencies for late payments, hiring a collection agency, or filing a lawsuit to make you pay up.
2. Fixed amount.
Usually, you can only get a personal loan for about $1,000 to $4,000. If you have a good credit score, the range is then from $5,000 to $10,000. If you have a good credit score and one or more well-paying income sources, like your own successful business or an exceptional investment portfolio, then it can go up to $50,000. Rarely, if ever, can you get a six figure loan. Usually, the cap is on the low end of the scale and only rises if you have a long-standing personal relationship with the lender or have a solid credit rating.
3. Fixed Interest Rates
Interest rates are based on your current financial situation and your credit history. Usually they are fixed rates. This means that you will pay the same amount on interest regardless of how much of the principal you have repaid.
However, in certain cases, a lender may choose to do a variable rate. In this event, interest will progressively decrease as the repayment amount owed is decreased. In most cases, the interest rate is high. Only if the borrower has a stellar credit history is it lower. Of course, the lower the interest rate, the easier it is to pay off the entire loan in a timely way. Some lenders take this into consideration.
4. Fixed Repayment Schedule.
Personal loan repayments are calculated in months, not years. So your repayment loan period can be set for 12, 24, 36 months and so on. The longer the loan period the lower the monthly cost but the higher the overall interest cost. In some cases, once the payment schedule is set, a penalty may be charged for an early complete balloon payment.
5. Difficult To Get.
Since personal loans are unsecured they are based on your personal relationship with the lender and a careful scrutiny of your credit-worthiness based on your financial history. Although you are free to do with the money as you wish, you are usually questioned on why you need the loan. Generally, lenders prefer to make other kinds of loans, where they can get more reassurance of repayment.
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