Information on Personal Loans
A personal loan is a sum of money that is lent by a bank to individuals so that they can meet various life needs. The funds may be used to pay for school tuition, a vehicle or even just as a way to catch up on bills. There are a few details that differentiate a personal loan from other types of debt.
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Unsecured
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Most personal loans are unsecured, meaning that the borrower's property is not tied to the loan. If the borrower defaults, the bank cannot come to retrieve an asset to cover the debt. However, in some cases, the bank may ask for collateral on a personal loan, such as a car that the borrower holds title to or stocks. There are a few rare cases where the personal loan is technically secured, such as in the case of payday (secured by a checking account) and title loans (secured by a car title).
Credit and Income Requirements
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Most banks will ask for a minimum credit score of at least 620 in order to grant a personal loan. In some cases, the bank may pass an application with a score of 580 or more. As far as income requirements, banks generally do not like the payments on an installment loan to exceed 35 percent of the borrower's monthly pretax income.
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Interest Rates
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The interest rates that are charged on personal loans are commonly much higher than other types of balances (like mortgage loans and lines of credit) because the bank is taking a much higher risk. The rate is also dependent on the applicant's credit score---the higher the credit score the better. The offered rate will vary from about 14 percent to as high as 25 percent or more, depending on the type of loan and customer data. Personal loans also commonly have fixed rates, as compared to credit cards, which are usually variable.
What It Can Be Used For
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Personal loans are commonly used to cover everyday expenses, such as medical or dental expenses, a vacation or a computer. The use of the loan is dependent on the borrower's personal needs and at his discretion once the funds are disbursed.
Installment Loan
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Credit card debt is "revolving," meaning that the debt can roll over every month into eternity if the debtor allows. Alternatively, personal loans are installment accounts. That means that there is a definite end. The monthly payment is the same every month and calculated based on an amortization schedule. The terms are similar to a mortgage loan in this way; only the length (in months) of the loan is much lower.
Loan Amount and Length
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The average amount that is likely to be lent for a personal loan is anywhere between $2,500 and $5,000. Payday and title loan companies will usually only disburse up to $1,000 at a time. Some banks may lend up to $15,000 or more, assuming that the borrower is judged to be a good risk, but this is uncommon on an unsecured loan. A personal loan will usually need to be paid off within one to five years.
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