Personal lending is one of the forms of short-term loans to individuals to solve their consumer goals that are not related to doing business.
A creditor can be not only a banking institution but also credit unions, as well as trade and service organizations.
Types of personal loans
Purpose loans are quick money designed for the purchase of specific goods or the implementation of certain plans. When a transaction is concluded, funds are often transferred not to the borrower’s account but to a third party who provides a product or service. With the help of purpose loans, the consumer can cover the expenses associated with carrying out repairs, paying for studies, the acquisition of household appliances, automobiles, and real estate. Loans are issued for a period of 3 months to 10 years or more. In cases of non-payment/delayed payment, the lender may tighten the requirements by raising the interest rate or imposing a fine. Therefore, you should take targeted loans consciously and adhere to all clauses of the contract. Rates on purpose loans often have a grace period without interest. The term varies from 1 month to 1 year, less often – up to 2 years. Such conditions are mainly designed for sales of mobile phones, household appliances, cars. In the lending sector, this is almost the only opportunity to purchase goods by installments without overpayments. In other cases, the rate fluctuates between 12-20% per annum.
Non-purpose loans are quick cash loans issued to citizens for a short or long period. The borrower does not need to indicate the purpose of the loan. And this is the main advantage of the product. Non-purpose loans are offered both by banks and private credit companies at a percentage above the average – at 15-35% per annum.
Credit card a payment card issued to users to them to pay a merchant for goods and services based on the cardholder’s promise to the card issuer to pay them for the amounts plus the other agreed charges. The tool is intended for cash withdrawal, cashless payments, purchase of goods and services by installments. Most cards have a grace period that allows you to use the established balance for free. After this period, if the card balance is not replenished, interest is accrued on the amount spent – an average of 20 to 50% per annum. Many banks charge card servicing.
Express loans are small cash loans that are provided by private microfinance organizations, microcredit companies and credit consumer unions for a limited period – from 3 to 30 days. They are also known as online payday loans, same day loans or cash advance. Funds are issued online by transfer to a card or bank account, as well as through stationary offices. The loan is approved within a few minutes. In microfinance organizations, customers can get a personal loan with a bad credit or no credit at all. In return for fast service and loyalty, the lender charges high interest rates. The borrower usually must reimburse the company from 1.5% to 2.2% per day of the amount received, respectively, the annual rate is from 550% to 800%.
To give out a personal loan, the lender considers a potential borrower for compliance with several conditions: most often a satisfactory answer is given to US citizens or legal residents aged from18 to 65 years old and having a proof of income. The last item on this list is not a prerequisite, especially when it comes to getting quick cash online. Also, very often personal loans are issued without collateral and guarantors, which is undoubtedly very convenient for the borrower. Some banks offer an additional service in the form of providing insurance in case of loss of work – it can become another important criterion when choosing a credit institution.
In order to get a personal loan, it is required to provide the lender with the necessary documents. The list is usually small: you need to have an ID and SSN. Also often a proof of income is required to confirm the solvency of the applicant. Naturally, the “weightier” the confirmation, the larger the loan amount and the lower the interest rate.
Recently, in order to get a personal loan, it was necessary to visit the bank, sometimes more than once – to submit an application and documents, go through an interview with the manager, and expect a positive response. This way of registration exists now, but every year it is losing popularity due to unreasonable time costs.
Today, the most convenient way to get a payday loan is to submit an application online through the lender’s website with the subsequent receipt of cash via transfer to a bank account or credit card. This takes a minimum of time.
Personal loan agreement
What to look for when concluding a contract? First of all, specify the full cost of the loan and request a repayment schedule.
Read the text of the contract, be especially careful about the presence of ambiguous language, the correct writing of the essential conditions – the amount, repayment period and interest. Beware of phrases like “conditions can be reviewed by the lender”.
The next important point is additional payments (some of which were mentioned above) that are not indicated in the repayment schedule, for example: commission for considering an application, for issuing a loan, for using a credit card (for cash withdrawals or for non-cash payments), for early repayment .
Late payment fees are also an important clause of the contract that needs to be considered. Of course, it is better to avoid getting to know the fines, but you should know exactly what amount you will have to part with if it becomes impossible to make the next installment in time.
How to reduce the probability of loan rejection?
It also happens that a loan request is declined. Why can this happen?
First of all, banks and other lenders pay special attention to credit history: if you had delays in repayments or other problems with repaying a previous loan, then it is likely that you will not be approved for a same day cash advance. And they’re checking your using a common database. Oddly enough, the lack of credit history will not be a plus either.
Secondly, the reason for refusal may be an incorrectly completed application. However, recently due to the spread of online application, the probability of errors has been reduced.
Thirdly, they may refuse you if your documents do not have enough information about solvency. To avoid this, submit documents proviging information on deposit accounts, documents on property (not only real estate but also other valuable property) and even receipts for paying utility bills.
Fourthly, banks have “unloved” groups of clients – employees of dangerous professions, people with a criminal record, individual entrepreneurs and some others. To minimize the possibility of refusal, it is better to find out in advance whether the selected bank provides loans to everyone or whether it has limitations.
The risk of refusal will be reduced by the availability of an account at the creditor bank, certificates of additional income included, copies of the passport confirming recent trips abroad. But be sure to submit only valid documents to the bank and check that they are correct.
Advantages and disadvantages of personal loans
- the decision is made within one business day;
- the client receives cash very quickly – same day or next day;
- the possibility of early repayment;
- minimum paperwork required.
- the term is quite small, and the interest rate is high;
- the bank may require insurance;
- only official incomeis taken into account;
- strict age restrictions;
- if payment is not made on time, fines will be charged.
6 personal loan myths that everyone believes in
Myth 1.High interest rates and financial burden
Borrowers often confuse the concept of interest rates and annual overpayments. Interest rate is the amount that the bank accrues for using the loan for the year. Interest is accrued only for the past period, that is, it cannot be paid in advance. Of course, the lower the rate, the more profitable the loan. When reading the contract, you should always pay attention to how the bank forms this rate and what parameters it depends on: maybe the bank’s offer will be unprofitable for you and you should look for another one.
The actual amount that you overpay for the year can be very different from the interest rate.
The shorter the loan term – the lower the overpayment. Therefore, it is worth choosing a minimum period with a comfortable monthly repayment amount. Follow the contract – and no “financial burden” threatens you.
Myth 2. If I do not pay on time, this will ruin my credit history
Not everything is so categorical. The situation can really be not simple: a person has lost his or her job or got sick. If you provide the lender with documents confirming temporary disability and the inability to repay the loan, they may offer payment deferment.
Another kind of myth – if you refuse a loan, it can also ruin your credit history. In fact, the Credit Bureau keeps track of only actual loans and all those tempting offers of banks that you refused will not spoil your financial reputation.
Myth 3. To get a loan, you need to have a perfect credit history
This statement follows does not quite correspond to reality. If you had isolated cases of non-temporary payments, but otherwise you regularly paid under the contract, this will not significantly affect your credit history.
However, do not underestimate the influence of this factor. The credit bureau collects information on absolutely all consumer loans – both in banks and in microfinance organizations. And if you once decided that a $300 loan is not worth much attention and paid from time to time – be prepared to get a rejection.
Myth No. 4 In case of late payments, the bank may sue or appeal to collectors
It is beneficial for banking organizations to build long-term relationships with a client, so they try to meet each other in different situations. Overpayment interest is one of the main income items of the lender. And the court and collection agencies are extreme measures to which the lender resorts exclusively in case of large and long-term debts.
Myth 5 You cannot repay a loan ahead of schedule
If you decide to repay the loan before the contract expires, in most cases the lender will not impose penalties on you. It is beneficial for the lender to have a solvent client, so they will simply calculate the amount of interest on the day the loan amount is repaid in full. But! All this becomes possible if the loan agreement indicates the possibility of early repayment. Sometimes banks charge fees for early payment or completely exclude such an opportunity. Read the contract carefully!
Myth 6: Personal loan amounts does not exceed $1,000
Today, banks are oriented towards the middle class and offer loan amounts exceeding $1,000. For example, you can use FBTET and get a $5,000 loan for a favorable period of 6 months to 5 years.