Fundamental Personal Finance: Loans Explained

When learning about personal finance loans are one of the most important topics to understand. Personal loans can help you accomplish a number of different things and be used in a variety of circumstances. Here are the basics of personal loans and how they could potentially help you.

Personal Loans

Personal loans are offered by a number of different financial institutions. Most commonly, you will try to obtain a personal loan from a bank. You could also choose to visit a credit union in order to obtain a personal loan. With a personal loan, the lender is going to provide you with a certain amount of money that you will have to pay back over a given period of time.

Applying for a Loan

When you find a lender that you would like to potentially work with, you will need to fill out a loan application to be considered for a personal loan. The application process typically takes 20 to 30 minutes for you to fill out the necessary paperwork. They will ask you many questions about your background and financial situation.

Credit History

When you apply for a personal loan, much of the decision by the lender will focus on your credit history. With personal loans, the lender is going to put an emphasis on doing business with those that have good credit histories. This means that you will have a better chance of getting approved if you have a solid credit history. The lender is going to pull your credit file and take note of your credit score. Your credit score is a compilation of your entire credit history. It is based on things like your debt load and whether or not you make your monthly payments on time. If your score is high, you will have a much better chance of getting approved for the loan.

Interest Rates

Many personal loans will have a higher interest rate than what you can get with a secured loan. For example, if you were to borrow money for a house or a car, the house or car would be securing the loan. In this case, the lender knows that they could simply foreclose on the property to recoup the costs of the loan. However, when you are asking for a personal loan without offering any collateral, the lender is going to charge more interest because this type of loan represents more risk for them.

Payments

Once you are approved for the loan, you will have to start making regular payments towards the balance of the loan. Typically, the monthly payment will be made up of a payment towards the principal of the loan and another portion towards the interest. If you make larger payments than what you are required to pay, the extra will typically go towards paying off the principal of the loan faster.


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