A personal loan is a loan provided by a financial institution for the purchase of goods (works, services) for personal, household and other non-production needs. It is the most popular banking service today. Banks offer personal loans for a variety of purposes: the purchase of furniture, household appliances, the purchase of housing, cars, travel vouchers, payment for education, treatment.
Obtaining a loan implies the obligation of the borrower to repay the principal amount of the debt within the terms established by the loan agreement, as well as to pay interest for using the loan.
What are personal loans?
There are two main types of personal loans. These are purpose and non-purpose loans. Purpose loans imply the use of credit funds for strictly defined purposes and spending on them is carefully controlled by the lender, but the money you received on the terms of non-purpose lending is at your complete disposal and does not require reporting to the lender. However, the disadvantage of on-purpose personal loans is a higher interest rate.
There are many other criteria by which personal loans are classified. So, they can be divided into long-, medium- and short-term, depending on the term of the loan; on the presence or absence of collateral or surety, etc.
Also, one of the forms of personal lending is an installment plan.
Pros of a personal loan
- No doubt, the greatest advantage is that you can avoid paperwork. To get approved with one of our participating lenders, you only need an ID and proof of income. But banks request a lot of documents;
- The second advantage is fast approval and funding. The lender makes a decision within a few minutes. If approved, the funds will be transferred into your bank account within 24 hours;
- You have the right to indicate the size of monthly payments yourself and, if desired, to repay the loan ahead of schedule.
Cons of a personal loan
- The main disadvantage of a personal loan is high annual rates. They significantly exceed the rates for legal entities;
- Another disadvantage is that some lenders accept only the official income of the borrower. But we cooperate with lenders that are ready to accept both official and unofficial income;
- Many banks set age limits for getting a loan. As a rule, the age of the borrower should be between 25 and 60 years old. But we cooperate with lenders that approve loans to consumers who are at least 18 years old;
- But the main disadvantage that must be taken into account when applying for a personal loan is responsibility. The borrower has obligations to the lender that must be fulfilled. Their violation entails certain consequences for the borrower. Delinquencies and debts on personal loans may in the future block access to other lenders. According to data from the Credit Bureau, personal loans are showing an increase in the number of delinquencies in the first quarter of 2021. The largest delays occur on credit cards, many of whose owners forget about the need to service them.
How to choose the best personal loan?
So, you “soberly” assessed your financial condition and decided to take a personal loan. What should you pay attention to?
- Loan type. Keep in mind that the easiest loans to obtain are the most unprofitable. Are you offered a loan without collateral and guarantors, with one or two documents in hand? Be prepared that the interest rate will be very high since this type of lending is very risky for the lender;
- Effective interest rate. You are promised 20-22% per annum, and then it turns out that the effective interest rate that banks have recently been obliged to disclose to the client is much higher than the stated one? Do not hesitate to ask the credit counselors to tell you the final interest rate in advance and schedule the payments – they are obliged to do this. Pay particular attention to the total amount of the overpayment and the amount of the monthly loan payment;
- Insurance contract. Now almost every bank offers to purchase a life and disability insurance contract when receiving a personal loan. In most banks, insurance is optional and completely at the discretion of the client, but some credit organizations insist on insurance, which increases the effective loan rate. The cost of insurance in each bank is individual, and it can vary from program to program. Remember that banks are not allowed to impose a specific insurance company! Loan insurance is convenient for both the bank and the borrower: the bank minimizes the risk of loan non-repayment for reasons related to the disability (death) of the borrower, and the borrower takes care of the relatives – if an insured event occurs, the debt will be paid not by the borrower’s relatives but by the insurance company. However, do not forget to carefully read all clauses of the insurance contract, including those written in very small letters (as well as all attachments to the insurance contract). Be sure to study which cases are not insured. Sometimes the contract lists so many causes of incapacity for work (death) that are not an insured event that it becomes clear that this is an attempt by the insurance company to evade any obligations altogether. And then the question arises – why does the borrower need such insurance?
What else in the loan agreement should alert you:
- the right of banks to unilaterally increase the amount of interest charged on the loan;
- restrictions on early loan repayment;
- very tough sanctions for any, even the most minimal, misconduct on the part of borrowers;
- other conditions that can put the borrower in an enslaving dependence on the lender.
Don’t rush to sign the contract! Read all paragraphs, even in the smallest print. Do not hesitate to clarify, ask questions, request the relevant company documents. If there is such an opportunity, do not sign the loan agreement immediately after reading it, take it home, read it carefully again, consult a competent financier or lawyer.
If you have already decided to take a personal loan, it is your direct responsibility to repay it on time and in full in accordance with the loan agreement and the payment schedule.