Personal Loans

Personal loans include loans for which the funds received can be spent only for personal needs. This can be the purchase of goods (furniture, household appliances, clothing) or payment for services (treatment or training).

Basically, this also includes loans for the purchase of real estate (mortgage loan) and for the purchase of a personal car (car loan), although banks are trying to display them in separate groups.

It is worth noting that such loans make it possible to purchase this or that product here and now, subject to all terms – that is why they are so popular. Note that often these are loans with a small nominal value for a relatively short period.

Types of personal loans

There are so many banking programs that choosing the best one is not a trivial task for the borrower.

The fact is that each credit institution in the line of financial products has loans with different terms and requirements. The variety is simply explained: the bank wants to attract as many borrowers as possible.

To make a decision, a rough idea of the main types of personal lending is useful. There are the following types of personal loans:

Targeted and non-targeted

Targeted is issued only for specific borrower’s needs. In this case, the client will not receive the money: the bank transfers the amount directly to the supplier of goods or services. Usually this type of loan is offered in shops, travel companies or private clinics.

A non-targeted loan means issuing cash for any need. The borrower decides for himself what to spend the money on. This is perhaps the most popular type of personal lending.

Short-term and long-term loans

Loans are considered short-term if they are issued for a period not exceeding 12 months. If the loan term is more than a year, then this banking product can be classified as long-term.

Secured or unsecured

Such loans imply or, accordingly, do not imply collateral to receive money. Both the amount of the loan and the terms of debt repayment depend on the availability of collateral.

Is it possible to repay a personal loan ahead of schedule?

Banks are not very interested in the borrower repaying the loan ahead of schedule, it is more profitable for them that you pay them throughout the entire loan term (after all, you pay the bank interest for using the loan, and this is the main source of income for the bank).

For this reason, banks are introducing a moratorium on early repayment, that is, the period during which you cannot repay the loan early. This period for different banks ranges from 1 to 6 months. There are banks that charge an additional fee for early repayment of a personal loan, 1% -10% of the early repayment amount.

Before signing a loan agreement, you must pay attention to the possibility of partial early repayment. If such a possibility exists, you need to inquire whether there is a minimum amount of partial early repayment, how much it will be in monetary terms (most banks introduce a minimum amount for partial early repayment). In case of partial early repayment, you will be given a new payment schedule (debt will be recalculated, the amount of the monthly payment will be less).

The main differences between personal loans

  • Simplified underwriting procedure;
  • The minimum package of documents from the borrower (identity card, income statement);
  • The highest interest rates compared to traditional bank lending;
  • Short term of crediting – from 3 months to 5 years. On average, about a year;
  • The object of personal lending can be not only money (cash or non-cash), but also the goods for the purchase of which the client asks to issue a loan;
  • Securing a loan, insurance or surety – this term is met only if we are talking about large loan amounts issued in cash for the maximum possible period, or in the case of buying expensive property (for example, a car).

Pros and cons of personal loans

Considering a credit card and a loan separately, each option has its own individual advantages and disadvantages. The main advantage of a personal loan is the ability to immediately receive a fairly large amount that can solve many financial problems. Also, among the advantages, the following points can be noted:

  • the loan is issued in full immediately upon signing the agreement;
  • the borrower gets access to promotions that allow him to purchase goods and services at a large discount;
  • in most cases it is enough to provide a minimum package of documents (an ID and certificate from the place of work) to issue a personal loan;
  • high competition between banks contributes to the systematic revision of the terms of issuing loans in favor of the client.

The main disadvantages of personal loans include:

  • the presence of an interest rate, which ultimately leads to an overpayment;
  • problems with taking out a loan by persons without official registration for work or receiving an inofficial salary;
  • the presence of severe penalties for late payments, as well as in cases of impossibility of full debt repayment;
  • long-term payments, which can result in debt dependence if the borrower’s solvency decreases over time;
  • age and other restrictions that prevent lending to certain groups of citizens.