It’s not only the businesses that need an extra infusion of cash, but it could also be you as an individual too. There is nothing bad if you feel that borrowing some money can help you fulfill your requirements. As an individual, you may need money for a variety of reasons. It could be for repairing your car, your treatment, buying a new vehicle, or anything else. For personal loans, you may need help from banking organizations or non-banking ones. It depends on you whether you want to take a loan from the former or latter. Here, we have explained what is a personal loan and how it works.
What is a Personal Loan?
A personal loan is a fixed amount of money borrowed by an individual from a bank or lender. It could be of any purpose like buying an appliance, vehicle, payment of the medical bill, or anything. You have to sign a contract stating the fixed rate of interest and repayment period.
Personal loans are considered unsecured. There is a reason for it. For example, you apply for a personal loan, then you do not need to put up a guarantee, like a house or a car. Now, if you won’t make the payment in the said term, the lender or bank cannot take hold of your house. That’s one of the main reasons that personal loans are given with a high rate of interest.
How Does Personal Loan Work?
We have explained the process by listing the steps that you have to go through. This will give you a clear idea about the whole process.
Step #1: Decide From Where You Want To Obtain A Personal Loan From
Banking Organizations And Credit Unions
These are the ones that possess a banking license and are governed by the FDIC, OCC, Federal Reserve, and NCUA. Whenever someone plans to borrow money, the first thing that comes to their mind are banks like Discover. Each bank has its own way of proceeding with the loan. You can visit their loan department and discuss the whole process.
Also read: Here Are The 6 Steps In The Lending Process!
In the case of credit unions, the qualification process is less strict as compared to banks. Also, none of them charge origination fees for a personal loan.
These are the opposite of the banking organizations as they don’t own a banking license. That’s why the terms Non-banking financial institutions are used for them. These could be insurance companies, finance companies, lenders, or other entities.
If you go for this option then the interest rate will be high. People mostly turn to them when their loan application is not approved by banks. These are considered the best ways of borrowing money as it may involve hidden charges.
Step #2: Compare The Personal Loan Policies
Every institution uses its own terms and conditions so it is best that you compare them. Check the minimum and maximum loan amount you are allowed to apply for. Check their repayment terms, additional fees, interest rate, final repayment amount. Also, if there is a special clause in case you fail to repay in the given time.
Step#3: Check Your Eligibility Criteria
After that, check whether you are eligible to apply for a loan or not. Check whether you meet their minimum credit score requirement or not. Some lenders do not provide personal loans to people who don’t have a stable job so check that.
After that, check whether your income passes their requirement. If you are not a US citizen, it could be an issue with lenders.
At last, your age has to be in a certain range. These are some of the details that will increase your chances of loan approval.
Step #4: Applying For Personal Loan
Once you find that you fulfill the eligibility criteria, its time for you to apply for a personal loan. Fill the form with the necessary details like your name, address, contact number, or more. If the bank provides online service then you can directly go to their website or visit their branch. Along with your details, you need to attach some documents too.
The first and foremost requirement is your government-issued proof. Other than that, you may need to submit your proof of income, financial documents, or tax identification number too.
Step #5: Wait For Approval From The Bank Or Lender
It will take from a few hours to a few days to receive the approval details from the bank. If they find all the details sufficient you will receive an approval. In case, they are not sure then they will ask for further details to verify you and add to the preapproval stage.
With approval, you will receive a loan contract or agreement stating all the details. After that, the lender will transfer the personal loan amount to your account. This process will take a couple of days.
Step #6: Start Repayment And Close Your Loan
According to your personal loan’s terms and conditions, you must start repayment in installments. In most cases, it is done on a monthly basis. You can either make the payment to the bank account directly or use a cheque.
In case, you have sufficient money to repay before the repayment term ends then check the policy. In your policy, there are terms for the exception cases too. You cannot transfer the whole amount directly without consulting the lender or bank. Once you make the complete payment by the end of the payment term, it’s time to close the loan contract.
We hope this article gave you complete details about what is a personal loan and its process. However, it is best to take extra care while applying for a personal loan. The companies often mention additional charges like prepayment penalties in the loan contract. If you do not read the agreement properly you may have to suffer in the near future. So make sure you do not skip a point.
We have tried including all the details so that you can understand it properly. In case, you have any doubts related to this topic then feel free to ask us through the comment section. We will try to answer your personal loan related queries as soon as possible.