How Do Personal Loans Work

What is personal loan? A consumer loan is a money you borrow from a bank to buy goods and services for yourself or your family. Consumer credit is only given to individuals; a company cannot take it out. In addition, there are consumer loans. They can be taken from microfinance organizations, credit consumer cooperatives, and pawnshops. It is essentially the same as a loan. But the terms of the loan may be very different from those of a loan. Let's try to understand how personal loans work.

What personal loans are available 

A consumer loan is a standard bank loan that is given for a specific purpose or for a particular need of the borrower. Depending on this, the loan is called a purpose or consumer loan. After signing a consumer loan agreement, the client receives the money in cash at the bank, on a card, or an account and can spend it at his discretion. If the loan is targeted - to buy a car, for example, the money can be immediately transferred to a specific seller. It is precisely how car credit purchases are handled in a car dealership.

But here is one question: how personal loan works. First of all, the loan can be:

  • Express credits in stores. It is a small loan for something you like in a store: a phone, a computer, furniture, or even a fur coat. These loans are called "express" loans because they can be applied for and received very quickly, in half an hour. Any store which has a loan program with a bank will tell you how to obtain a loan without leaving the counter - in other words, right in the store. Conveniently, it is issued only with a passport—no need to go to the bank. A disadvantage is a relatively high-interest rate, due to which the bank covers the risk of default. Monthly payments on express loans are usually small, but the rate can exceed 30% per annum. Add up all the costs together, calculate the overpayment on loan, and then weigh the pros and cons - maybe you will be able to save the necessary amount.

  • Consumer loans in cash. The most popular type of credit. It is suitable for those with big and not-so-big expenses: repairs, medical treatment, or even purchasing a car.

  • Collateral loans. If you need a large amount at a relatively low-interest rate, you can give your property to the bank as collateral for the loan.

  • Car loan. Allows you to buy a new or used car at a low-interest rate. But you have to understand that the bank takes the car as collateral. And if you do not pay the loan, you will have to give it to the bank. That is why transactions with the pledge subject without the bank's permission are prohibited. That is, you can not freely sell the car.

So, now we can answer the question: how does a loan work? Consumer credit can be taken for a specific purchase - the target- without specifying the upcoming expenditure. It means you can receive money very fast for any things you need. 

The credit agreement is the basis for consumer credit

How does a personal loan work? An obligatory condition for the execution of the loan is an agreement. The loan agreement is the primary document that defines your relationship with the bank. To avoid unpleasant surprises, be sure to read it carefully, paying attention to the following points:

  • Terms of interest accrual. Should accrue not from the date of signing an agreement with the bank. But from the date of the actual receipt of the loan by the borrower.

  • The total value of the loan. It must be specified in the contract by law. If it is not, ask the bank to include this clause.

  • Early repayment of the loan. Carefully examine whether there are restrictions. Such as a commission for an early refund or a limit on the number of payments.

  • The order of penalties. Be sure to find this point. The number of sentences must be reasonable so that it does not turn out so that you will owe the bank a decent amount for the slightest fault. A fine of 0.5% of the loan amount for each day of delay. Or 15% of the overdue amount is considered acceptable.

  • The right of the bank to demand a loan ahead of schedule. There may be such a thing. Many banks have a clause in your contract that allows you to order early repayment if you have not been paying your loans well.

Check if your contract includes additional paid services you don't need: credit card, SMS-informing, voluntary life, health insurance, remote maintenance, or notary services. Find out if these items are mandatory or if you can opt-out of them. 

What is the difference between a consumer loan and a credit card?

A credit card and a consumer loan are similar financial tools that allow you to borrow money from a bank. A loan and a credit card have similarities and differences. A credit card is a payment instrument for a credit account opened with a bank. The purpose of spending the borrowed funds is not limited. The card can be used to pay for goods, services, tickets, and online purchases. When the card is issued, there is money on the card - a revolving limit set by the bank. The available balance is reduced when the cardholder spends money from the card - pays for purchases, withdraws, or transfers money. It is necessary to repay the debt to the bank in whole or part - by regular monthly payments, partially or entirely at the holder's discretion.

The main difference between a loan and a credit card is the way the interest accrues, and the amount you owe is repaid. The loan is repaid to the bank in monthly installments. Even if the money is not spent and lies in your home or account, interest for the use of cash is accrued on the whole amount from the first day. They should be paid regularly following the schedule, which is given in the bank, together with the credit agreement.

With the card, the debt is formed from the date of the actual expenditure of funds. The debt and interest will not be there if you do not use them. Plus, good is not charged on the entire credit limit but only on the amount spent. There is no clear payment schedule either. It is enough to make a monthly minimum payment, and the balance is to be repaid at random.

And what about personal loans? How does interest work on a personal loan? Interest on the loan is calculated according to a formula using a monthly or daily interest rate. The interest rate on consumer credit (loan) can be determined by applying a fixed or variable rate.

You can not put off your dreams for tomorrow with a competent approach to finances. The main thing is to choose a lender carefully, assess your financial capabilities in a balanced way and calculate a comfortable amount of monthly payment so that a consumer loan or a loan does not become a heavy burden for you and your budget.

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