Personal loans are typically general purpose loans that can be borrowed from a bank or financial institution. As the term indicates, the loan amount can be used at the borrower’s discretion for ‘personal’ use such as meeting an unexpected expenditure like hospital expenses, home improvement or repairs, consolidating debt etc. or even for expenses such as educational or going on a holiday. However, besides the fact that these are quite difficult to obtain without meeting pre-requisite qualifications, there are some other important factors to know about personal loans.
1. They are unsecured – which means that the borrower is not required to put up an asset as collateral upfront to receive the loan. This is one of many reasons why a personal loan is difficult to obtain because the lender cannot automatically lay claim to property or any other asset in case of default by the borrower. However, a lender can take other action like filing a lawsuit or hiring a collection agency which in many cases uses intimidating tactics like constant harassment although these are strictly illegal.
2. Loan amounts are fixed – personal loans are fixed amounts based on the lender’s income, borrowing history, and credit rating. Some banks, however, have pre-fixed amounts as personal loans.
3. Interest rates are fixed – the interest rates do not change for the duration of the loan. However, like the pre-fixed loan amounts, interest rates are based largely on credit rating. So, the better the rating the lower the interest rate. Some loans have variable interest rates, which can be a drawback factor as payments can likely fluctuate with changes in interest rates making it difficult to manage payouts.
4. Repayment periods are fixed – personal loan repayments are scheduled over fixed periods ranging from as little as 6 to 12 months for smaller amounts and as long as 5 to 10 years for larger amounts. While this may mean smaller monthly payouts, longer repayment periods automatically mean that interest payouts are more when compared to shorter loan repayment periods. In some cases, foreclosure of loans comes with a pre-payment penalty fee.
5. Affects credit scores – lenders report loan account details to credit bureaus that monitor credit ratings. In case of default on monthly payments, credit ratings can be affected reducing the chances of obtaining future loans or applying for credit cards etc.
6. Beware of lenders who approve loans even with a bad credit history – many such instances have proven to be scams where people with a bad credit history are persuaded to pay upfront commissions through wire transfer or cash deposit to secure the loan and who are left with nothing in return.