Utilizing Loans: Understanding Personal Loans Before You Apply
You may be considering a loan for a number of reasons and might be unsure of the type of loan you need. So before you start applying, we wanted to provide you with some of the basics regarding personal loans, to see if it’s a good fit for your needs.
What is a personal loan?
A personal loan is money borrowed from a bank or lender that you will pay back over a set period of time. When you apply for a personal loan, you can ask to borrow a specific amount of money. Unlike mortgage loans (to buy a house) or auto loans (to buy a car), personal loans can be taken out for a number of reasons.
Also, personal loans are different from credit cards and other forms of credit due to how you repay them. For example, when you pay back credit cards, you pay a monthly minimum, which will vary based on credit card balance, and depending how much you pay each month, that determines when you will pay the credit card off. However, with personal loans, you typically pay the same amount each month, and there is a set repayment period.
If this sounds confusing, don’t worry. Below we cover more about some of the common terms/language banks and lenders use.
What are some of the common loan terms?
- Principal — This is the amount you borrow. For example, if you apply for a personal loan of $5,000 and are approved, that amount is the principal.
- Interest — When you take out a personal loan, you agree to pay interest, which is what the bank or lender charges you for letting you borrow the money. The bank or lender will specify this.
- Term — This is the number of months you have to repay the loan. The bank or lender will specify this.
- Monthly payment — Every month, you’ll owe a monthly payment to the bank or lender. This payment will include money for the principal as well as interest. You will pay this each month until the end of the term or repayment period.
- APR — APR stands for “annual percentage rate.” APR incorporates both your interest rate and any fees for borrowing the money. Lower APRs mean you’re paying less to borrow the money.
If you are considering a personal loan, we hope this will help you understand the language banks and lenders use, so that you can make the best decision. Personal loans can be good when used properly. And, they do not have to be done in an office. There are several online lenders, for example Zippyloan. But, always remember to evaluate where you can apply, and try to keep your applications to a minimum.