Personal loans form a class of financial products that are aimed at the specific needs of individual borrowers. These are loans that aren't aimed at acquiring particular items, like with home mortgages or car loans. Instead, personal loans are meant to provide immediate money that someone can use in a variety of fashions. Those differences are important, and it's worth getting to know more about the topic if you intend to borrow money.
Who Offers Personal Loans?
The bulk of personal loans in the United States are backed by banks and credit unions. Such institutions make money by charging a set amount of interest each year to ensure they turn a profit on the loans they give. Payments then continue for a set number of years. This amount is commonly referred to as the "annual percentage rate," and it's the best tool you have for making apples-to-apples comparisons between personal loans offered by different institutions.
How Is the APR Calculated?
A bank calculates the APR by adding its desired margin for a loan to the U.S. prime rate. The prime rate is essentially how much it costs the bank to borrow money from either the government or one of the handful of banks large enough to serve a quasi-governmental role in the distribution of the money supply. Pretty much everyone, even billionaires and large corporations with incredibly good credit, pays at least the prime rate for loans.
It's that margin between the prime rate and your APR that's all about you. In particular, it's driven by the bank's perception of your creditworthiness. An officer of the bank will be assigned to assess any proposed loan, and they will look at a customer's history of making payments and credit rating as reported by the major credit agencies. They'll also examine the term of the loan and where interest rates are expected to go in determining what to charge.
If you are considered a credit risk, you may be asked to put up collateral to secure the loan or to have someone with better credit cosign. Cosigning entails taking financial responsibility for the loan if you can't pay it.
Uses for Personal Loans
Folks utilize personal loans for a variety of reasons, including paying off credit cards and medical debts, doing home improvements, getting married, and going on vacation. Some people also use them to start companies when they can't get business loans
Contact a business like Frontier Community Credit Union if you have more questions about personal loans.