Personal loans are usually general purpose loans that can be borrowed from a bank or financial institution. As the term implies, the loan amount can be used at the borrower’s discretion for ‘personal’ use, such as covering an unexpected expense such as hospital expenses, home improvements or repairs, debt consolidation, etc. or even for expenses like education or vacations. However, in addition to the fact that they are quite difficult to obtain without meeting the prerequisites, there are some other important factors that you should know about personal loans.
1. They are unsecured, which means that the borrower is not required to put up an asset as collateral in advance to receive the loan. This is one of the many reasons why it is difficult to obtain a personal loan because the lender cannot automatically claim the property or any other asset in the event of default by the borrower. However, a lender can take other measures such as filing a lawsuit or hiring a collection agency that in many cases uses intimidating tactics such as constant harassment, although they are strictly illegal.
2. Loan amounts are fixed: Personal loans are fixed amounts based on the lender’s income, loan history, and credit rating. However, some banks have predetermined amounts such as personal loans.
3. Interest rates are fixed – Interest rates do not change for the life of the loan. However, like preset loan amounts, interest rates are primarily based on credit rating. So the better the rating, the lower the interest rate. Some loans have variable interest rates, which can be a disadvantage, since payments can likely fluctuate with changes in interest rates, making it difficult to manage payments.
4. Repayment periods are fixed: Personal loan repayments are scheduled in fixed periods ranging from 6 to 12 months for smaller amounts and 5 to 10 years for larger amounts. While this may mean smaller monthly payments, longer repayment periods automatically mean higher interest payments compared to shorter loan repayment periods. In some cases, loan foreclosure comes with a prepayment penalty.
5. Affects credit scores: Lenders report loan account details to credit reporting agencies that monitor credit scores. In the event of defaulting on monthly payments, credit scores 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 bad credit; Many of these cases have proven to be scams in which people with bad credit history are persuaded to pay upfront fees by wire transfer or cash deposit to guarantee the loan and are left with nothing in return.