A personal loan is usually shorter term credit that is provided to an individual in order to help them meet their needs that can’t be fulfilled by other means. Some uses of the funds can be to consolidate debt, pay off bills, provide money for emergency situations like a medical condition, and more. Due to the variability of the interest rates involved in this form of financing, any potential borrower should contact multiple lenders as well to understand their terms and conditions before applying for an unsecured loan.
Generally these types of loans are unsecured, which means that the borrower will not be asked to put any collateral against the amount. This can make the financing both more accessible to more families, but it can also lead to higher interest rates as the individual will not need to put up any security backup. In other words, the personal loan a customer receives from a lender will be determined based on both integrity and the ability to repay it. So this means they may come with a slightly higher interest rate. There are many lenders that provide personal loans, including major banks, finance companies, and other private lenders.
Numerous banks and financial institutions provide unsecured personal loans, and the cash can be used for numerous reasons. The customer has flexibility in what they do with the money, but often the funds can help with paying bills and debt consolidation. Each lender has its own criteria as to who is approved, and the loan amount and the eligibility criteria varies from bank to bank.
After applying, the lenders will evaluate the application on multiple criteria, including, but not limited to, work experience, household income, the borrower’s ability to repay the loan, where they work, past obligations, age, and even where they live. These various criteria will also go into determining what the interest rate is. Note one advantage of an unsecured personal loan is the flexibility, as the customer does not need to tell them what they plan on using the cash for.
It will vary greatly. When a lender decides that someone is higher risk, but still decide to extend credit, they may decide to charge the individual a higher interest rate to make up for the risk they think the person may be. The funds from an unsecured personal loan may also be “more expensive” due to the lack of collateral put down.
For example, if the applicant has bad credit, the interest rate will be higher than if the person’s scores are great. Or if no collateral is put down, then the cost to borrow the money will also be higher. In certain cases, a bank may request additional security to be put up, and maybe it will be in the form of a personal guarantee that will be based on risk profile of the borrower.
Usually the interest rate that the person will be charged on an unsecured personal loan could range from anywhere between 12 to 25 percent. But it varies widely. These rates are still better than most credit cards and much better than terms and conditions from a payday lender. So there are some cases in which a loan can be used for debt consolidation because the rates will be better than the alternatives. More on debt consolidation.
The worse the applicant’s credit score, or the less collateral but down, the more expensive the money will be. If someone is applying for a bad credit personal loan, the rate may be in the 25% range (or higher). The factors indicated above determine an individual’s rate, such as risk profile, employment, and income level.
Lenders look at many factors. As an example, suppose the applicant works in a well respected industry, and a company with a strong reputation. That person may very well get an unsecured personal loan at a lower rate because of that when compared to say a self employed individual, which tends to be higher risk.
The dollar amount issued may not be impacted though. The self employed person may end up receiving a loan of the same dollar amount, but it may be at a higher rate of interest because the applicant may be considered higher risk when matched up with the person in the well respected company.
Interest rates are determined in a variety of ways and by many factors. As noted above, the interest rates on an unsecured loan can be variable, fixed, or flat. A flat rate is the most expensive to the customer, and it is a personal loan that charges the same interest based upon the principal amount throughout the tenure of loans. So be mindful of entering into a long term, fixed contract with a lender.
Compare that to a fixed and variable interest rate secured loan which also tend to be offered. In these cases the rates are often calculated on the reducing balance (as the loan is paid off over time). The funds are comparatively less expensive as the amount of interest the customer pays declines as the loan is paid off.
Terms and conditions vary, but personal loans are always shorter term and the most common are repayable over a period of time that may range from 12 to 60 months. Some people may even enter into an agreement that last weeks or just a couple months. Rarely will a loan go for longer than 5 years.
While as mentioned, the repayment terms as well as interest rates of unsecured loans will vary, for most lenders the prepayment fee is very expensive. They are a key component of any contact, and be sure to review this when deciding to borrow to meet any short-term needs. It is fairly common for lenders to have fees on late payments, origination costs, and much more.
For example, if someone is borrowing to pay some short term bills, and want to repay the loan in several months, if the prepayment fee is too high it may not be worth borrowing the money from that particular bank. Be sure to read closely to understand the stated conditions and terms before accepting the offer. Review all fees and penalties, and always check to the fine print of any unsecured personal loan.
Be careful when turning to a bank or lender for this type of funding. As with all loans, the individual should only borrow when their need for short term cash is very high and they are out of all other options. For example, do not use them for getting money to pay for a vacation! Using an unsecured personal loan to pay an unexpected bill, such as a medical emergency or consolidating debt may be good options if the interest rate is affordable. If any personal loans is not appropriately repaid and used they will increase the household’s debt burden and increase their financial hardship.