When you need to make a major purchase and do not have enough savings, a personal loan can be a logical solution to the problem. We will tell you where you can get it and how to conclude a contract so that over time it does not turn into a problem.
A personal loan is a money that you borrow from a bank to buy goods and services for yourself or your family. Personal credit is issued only to individuals, it cannot be issued to a company.
In addition, personal loans can be issued by microfinance organizations. In fact, this is the same as a bank loan but the terms of the loan can be very different.
Types of personal loans
They can be divided according to several criteria:
- By purpose. A personal loan can be taken both for a specific purchase – targeted, or without specifying upcoming expenses. For example, if you apply for a personal loan in a furniture or electronics store, the bank transfers the money directly to the seller. This is a targeted loan. If you take a loan and do not report on what it was spent on, it is considered general-purpose. Interest rates on targeted loans may be lower, especially if this is an affiliate program of a store and a bank;
- By collateral. When you take out a large loan amount, the bank usually needs additional guarantees that you will repay it. Collateral for a loan is often a car or other property, or surety of other persons. If the item is used by the bank as collateral, you can continue to use it, but you cannot sell it. In addition, the bank may ask to insure it. But interest on secured loans is usually lower than on unsecured ones;
- By timing. The timing of loans and borrowings is usually very different. Microfinance organizations offer short-term loans for up to 30 days, and short-term loans in a bank can be given for up to a year. The term greatly affects the interest on the loan. Usually the longer the term, the lower the rate. But exceptons may occur – you need to study the conditions of a particular organization.
How to get a personal loan?
Each bank, microfinance or other organization sets its own rules. For example, to get a loan at a pawn shop, it is enough to show an ID and leave something valuable as collateral. If you contact a microfinance organization, you also usually only need an ID, you can even get it online. And the bank can set much more conditions, especially for a large amount. But there are several general requirements.
There are only two mandatory documents: an identification document and a loan application.
Some organizations may ask you to show a second document with a photograph, for example, a driver’s license. This is necessary so that fraudsters are not able to collect loans and borrowings from other people’s documents.
Banks may require an income statement or other documents proving your financial viability. A complete list of documents can be found on the lender’s website or in his office.
Report your income
Your salary, pension, or scholarship is not always required to be documented, but it is usually required to report income. The maximum loan amount depends on this. The higher your income, the more credit you can repay.
If you have guarantors, you are ready to give property as collateral, then the amount of the loan may be even higher. After all, the bank takes less risk in this case.
Often loan agreements have a clause that obliges you to insure the collateral, your life or health. By law, you are not obliged to do this, but insurance will reduce possible credit risks, for example, to preserve mortgaged property if you suddenly lose your job and cannot pay the loan. With such insurance, the bank can offer you more favorable conditions for the size of the loan, term or interest rate. If a bank offers a loan with simultaneous life and health insurance, then it is obliged to offer an alternative loan option without insurance, but the conditions must be comparable in terms of the amount and term of repayment. You can refuse to buy insurance, but then the terms of the loan will change.
Things to remember before applying for a personal loan
Access your abilities
Calculate how much and for how long you need the money. But keep in mind that you will have to return not only this money but the added interest and possible additional payments.
If it takes about half of your annual income to pay off all the loans and borrowings, there is a risk of not being able to repay the debt. Keep in mind that payments should not exceed 30% of your monthly income.
Find out how much you have to repay
Be sure to find out the full cost of the loan. Take into account not only the amount of the loan and the interest rate, but also other expenses stipulated by the contract, for example, compulsory insurance or a fee for issuing a credit card.
The bank must indicate the full cost of the loan in the contract. Check if any additional paid services that you do not need are included in your contract: credit card, SMS, voluntary life and health insurance, remote services or notary services. Check if these items are required or you can refuse them.
Please note that the cost of the loan should not include services for which you did not give your consent: consideration of the application, preparation of documents for the contract, maintenance of the loan account.
Compare loan terms
Carefully select and compare offers from different organizations. Any bank, microfinance or pawnshop has the general conditions of a consumer loan agreement – these are standard requirements for anyone who wants to take a personal loan. They can always be found on the organization’s website or in its office. But each contract has a set of individual conditions – they determine the amount of a loan, interest, the timing and amount of monthly payments.
Individual conditions may contain additional points. All of them must be agreed upon by the bank and the borrower.
All conditions should be indicated in a special table at the beginning of the contract and should be clear to you. The contract itself can be considered concluded only if you and the bank have reached agreement on all points.
When concluding the contract, pay attention to the currency of payment and the interest rate. You should especially carefully check:
- Schedule of payments (quantity, size and frequency). Make sure that you can give the bank the amount of the monthly payment on time. You’d better play it safe: for example, if you have a salary on the 20th of every month, you should choose a payment deadline not earlier than the 25th. After the conclusion of the contract, the bank must give you a payment schedule. The terms of payments must be specified in the contract;
- Terms of early payments and termination of the contract. Usually, you can repay a loan earlier if you notify the lender of your decision within 30 days. But a shorter notice period may be set in the contract, check this in advance;
- Fines and penalties (included in the individual conditions of the contract). Specify what will happen if you fail to comply with the payment schedule. If you know in advance that even a day of delay will cost $50, then perhaps you will more closely monitor the dates on the calendar;
- Processing of personal data. There may be a clause in the contract that you authorize the use of your personal data. Specify how they will be used. If the lender plans to send you advertising mailings, then you can refuse;
- Transfer of rights (claims). There is always a clause in the agreement on the possibility of assignment of rights (claims) under a personal loan agreement. That is, the bank will be able to transfer your debt to third parties, and they will already be engaged in its collection. You can prohibit the assignment of rights, but in this case, the bank has the right to offer other loan conditions or refuse to conclude an agreement at all.
Take your time to review the contract, do not sign it right away. And you can compare the offers of different lenders and choose the one that suits you.