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Personal Loans and Their Characteristic

Personal loans are one of the financial products that are sold the most in both private equity companies and banks of all life. However, many clients do not fully understand how it works. For this reason from Lenders we want to explain what personal loans and their characteristics are. Would you like to know more about this topic? In that case, continue reading the next post.

What personal loans are and how they work

What personal loans are and how they work

When we talk about personal loans we do it to refer to that financial product by which a credit institution offers an amount of capital to a user. The borrower The agreement obligates the borrower by contract to return the borrowed amount plus an interest rate based on the risk of the operation. The expenses deriving from carrying out said financial operation are also usually included in this amount.

What are the characteristics of personal loans

What are the characteristics of personal loans

Today in the market there are a variety of personal loans. This great diversification offers customers a large number of offers. Although until a few years ago it was an almost exclusive product of banks, the outbreak of the crisis opened the market niche. Currently private equity companies and private lenders also offer personal loans.

And precisely because of the large number of offers it is important to value this product well before contracting it. The recommendations of the Lenders experts in this regard are clear. Before deciding on one or another personal loan it is important that you pay attention to the following aspects :

  • The interest rate This value is the price that the credit company marks in exchange for lending you the money. You can check both the TIN (Nominal Interest Rate) and the APR (annual equivalent rate). To truly know what expenses our personal loan brings, it is best to study the APR, since it is a much more complete value.
  • The commissions that the product includes. These can be opening and cancellation. Within the cancellation fees there are companies that charge for partial and total cancellation.
  • Possible associated expenses.
  • Amount that we must pay each month. This will be calculated based on the selected repayment term and the APR of which the loan is available.
  • Amortization term.

The guarantee within personal loans

The guarantee within personal loans

Any loan that we request must offer certain guarantees to the lender that we will be able to return the amount along with the interest. In the case of mortgages, for example, it is the home itself that we acquire that acts as collateral for the loan. But what is it that serves as collateral for personal loans? Well, there goes the surprise: all your assets, present and future, will serve as collateral in case of default. What does this mean? That if at any given time you stop paying the fees due to lack of liquidity, the credit company will have the right through the courts to seize the accounts and get the money you owe.

The problem with this formula for the lender is that said assets may be higher or lower depending on the borrower. Therefore, the default risk assumed by the credit companies is greater. Due to this characteristic, the interest rates are higher and the amortization periods are usually shorter than those of other types of loans. For example, mortgages.

The purpose within personal loans

personal loan

As a general rule, the purpose for which the capital is requested is usually relevant for credit companies that grant personal loans. Although it does not have to be a problem with the reasons that lead you to ask for a loan, it is true that they will be weighed. That is, if you ask € 5,000 to buy a dishwasher, the logical thing is to be denied. Basically for lack of coherence. Therefore, the amounts that are requested must be proportional to the type of expenditure that we want to make.

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