Personal Loans

What is a Personal Loan?

A personal loan is a loan that can be used to finance just about any personal expense. Such loans are used for a variety of reason, including:

  • Auto Repairs
  • Debt Consolidation
  • Vacation Expenses
  • Medical or Dental Expenses
  • Major Purchases

Personal loans are variable in other aspects as well.

  • Interest rates: For personal loans, interest rates depend on several factors, including the collateral used to secure the loan, the borrower’s credit history, and the size of the loan.
  • Loan repayment lengths: Loan term lengths vary from 24 to 60 months. Payments are made both toward the loan amount – known as the principal – and the interest.

Personal Loan Vocabulary

Every personal loan comes with certain conditions for repaying it. These conditions, primarily dictating how much money the borrower pays back each year and how many months the borrower will be paying off the loan, are called the loan terms.

Here are some of the key terms for understanding loan terms:

Interest Rate/Contract Rate: This is the amount that is charged by a lender to a borrower for the use of money. Interest rate is expressed as a percentage of loan principal.

Prepaid Finance Charges: These are charges that are not included as part of the principal amount being borrowed and must be paid upon the close of the loan. Prepaid finance charges can include such things as administration or origination fees.

APR: This is different than the Interest Rate. It stands for “Annual Percentage Rate,” which is the cost of credit expressed as an annual rate. The APR factors in interest and Prepaid Finance Charges. If Prepaid Finance Charges, the APR is often higher than the Interest Rate.

Repayment Period: The period of time over which a borrower agrees to pay back a loan.

Principal: The portion of the original loan amount a borrower still owes to a lender.

Amortization: In the context of lending, this is the organized repayment of a loan according to a set payment schedule in regular installments over a period of time.

Getting a Personal Loan

When evaluating a loan application, lenders will consider various factors in order to decide whether the prospective borrower is eligible for a loan.

Often the biggest consideration when deciding whether to provide a loan is the individual’s credit history. Lenders will pull the prospective borrower’s credit report and credit score from a credit-reporting agency and then assess how the consumer has managed credit in the past.

The credit report, together with the credit score (which is based on the information of an individual’s credit history), gives lenders an indication of the individual’s ability to pay back a loan.

Depending on the borrower’s credit report and credit score, the borrower may not qualify for certain loan sizes or the best interest rates.

Where to Get a Personal Loan

There are many sources to obtain personal loans, including:

Banks: Banks tend to require borrowers to have high credit scores and excellent credit histories. The application process may be longer and more involved than the processes at other loan sources.

Credit Unions: Credit unions offer the same basic services as a bank—however, these services are only available to credit union members. They are not-for-profit entities, and members who bank at credit unions are considered to be the owners of the financial institution.

Peer-to-Peer/Marketplace Lenders: These lenders normally match borrowers and lenders through online virtual marketplace platforms. The loans issued are often comprised of many different investors ranging from individuals to institutional investors. Investors usually fund only part of a loan and spread their risk across multiple borrowers. The company that runs the marketplace usually profits by charging a fee on each transaction.

Payday Lenders: Payday lenders provide small, short-term, unsecured loans that borrowers must repay on their next payday. The finance charge for payday loans are usually priced at a fixed-dollar fee. Due to the short-term nature of these types of loans, the annual percentage rate often exceeds 100%.

Personal Lenders: Non-bank financial institutions specializing in personal loans offer products that may range from $1,000 to tens of thousands of dollars over repayment periods greater than a year. Personal lenders may lend to fair or good credit borrowers who have been declined for a bank loan, but often at a higher cost to the borrower. Applications often can be completed online, and funds can be deposited in the borrower’s bank account very quickly, sometimes by the next business day after the loan is approved.