Over the years, personal loans have been making a lot of lives easier. With the constant transaction of borrowing and lending, it is easy to understand the significance of personal loans. The technology is leading the online shopping sites to their business peak. Sites like Amazon and Flipkart have initiated a debit card EMI system.
These debit card EMIs aim to speed up purchases as well as transactions. You do not need to wait for months or years on an end to save enough money to buy what you need. You can buy what you want by paying in instalments, using your debit card for a given period of time. It is like borrowing money and paying for an item online. In return, the site deducts a fraction of your money from your bank account. It also deducts with it, some nominal interest every once in a while.
A personal loan is a one-stop solution when you would want to reduce financial pressures on yourself. It is clear that the procedures to take up personal loans are getting easier. It is also getting a bit complicated to understand certain concepts of personal loans. If you are someone who is looking forward to take a personal loan, this guide right here is exactly for you!
1. The basic purpose and mechanism of Personal Loans:
What are personal loans?
Amidst financial issues, you might always look for a source from which you can get some financial help. Personal loans are very welcoming in these cases. These kinds of loans are available in banks. In certain cases, some individual lenders can give out such loans.
What the procedure of getting a personal loan is?
The process of applying for a personal loan is much easier than you might think! Especially with the dominance of technology, getting an online lender saves a lot of time. Before you can qualify to get a loan, a lender will enquire about your credit score. He/she also may ask for your income and employment details, and your debt-to-income ratio. The aim is to make sure that you can pay the loan back when the time comes.
How does the system work?
Once you qualify for getting a personal loan, you borrow a certain sum of money. You use this money for whichever purpose you borrow it for. What some people do wrong is misinterpret this loan as “free money”. This is possibly one of the biggest mistakes that you can do.
When you get the money and use it for your purpose, you also have to keep in mind that you have to return the money after a certain period of time. But the money you have to return isn’t the same as the money that you have borrowed. You have to pay back with a certain amount of interest, too.
Some loans are secured while mostly other loans are unsecured. Secured loans need collaterals. Unsecured don’t. Secured loans have a lower rate of interest. Unsecured don’t.
2. Who to go to for a Personal Loan?
There are two sources of getting a personal loan. One is the banks. you might know that for sure. But what some people do not know is that some individual lenders lend out personal loans, too. What you need to make sure about is if they are legitimate or not. You can check out their details on the Better Business Bureau. Another such confirmation source is the Consumer Financial Protection Bureau.
3. Interest rates
Your goal, as a borrower, is to understand that the best source for you to get personal loans from. That is the source which would want the least amount back from you. This is only possible when you know that the source you are borrowing from is wanting the least amount of interest, compared to other sources. Hence, you have to look for where you are getting the least rate of interest.
The interest rate has a multiplicative effect on the interest amount that you have to pay along with the principal amount. Hence, lower the interest rate, lower the amount you have to pay back. And lower your financial burdens.
The bottom line is to check the rate of interest that the lenders or banks impose on you. Choose the source which imposes a low rate of interest.
4. Origination Fees
Sometimes, some lenders might ask you to pay a certain percentage of your loan amount. They call it Origination Fees. What is Origination Fees? It is the amount of money that is spent in incorporating the process of lending the money to you. It can range from 1% to 6%.
5. Prepayment Fees
It must be quite clear that it would be inconvenient for the lender if you are unable to pay off the loan on time. But did you know that paying off your loans way before your due date is also a cause of loss? A very early payment means that the lenders are running short of some interest amount that they were expecting in the beginning. To make up for this loss, some lenders ask for an extra amount of money. This extra money is the Prepayment Fees.
6. Alternatives to Personal Loans:
Can alternatives to personal loans be more beneficial in cases of borrowing money?
Under various conditions, you should opt for alternative ways of getting financial aid. For that you have to know in great detail about the alternatives and their uses, advantages as well as disadvantages. Some of the alternatives are credit cards, business loans, salary advances, peer-to-peer loans, etc.