Understanding Personal Loans: What to Know Before You Apply

If you're looking for a loan to fund a significant purchase or consolidate debt, you should take the time to understand the loan terms. Loan agreements are legally binding contracts with terms that vary based on the loan type and lender.

So, even if you're in a tight spot and require the money immediately, knowing what you're getting into is essential before signing on the dotted line. In this personal loan guide, we explain what you need to know when applying for a personal loan, including the easy-to-understand aspects and terms that can be more puzzling, so that you can make an informed decision.

Standard Terms You'll Encounter in a Personal Loan Agreement

When reading the loan agreement fine print, there are terms you'll come across that you’ll need to understand before applying. These include:

• Interest rate: The interest rate refers to the total amount you'll pay alongside the principal payment as a charge for borrowing the money. It is usually based on the annual percentage rate (APR) – interest plus other fees charged within 12 months.
• Amortisation Schedule: This is a complete structure of the payment schedule, including the loan amounts payable until the final repayment date.
• Collateral: Collateral is any item you surrender to the lender for your personal loan. The lender obtains a temporary lien over the property until you repay their debt in whole or if you fail to repay at all.
• Grace period: This is the period a lender gives you before imposing any penalties for late payments. Once the tenure of the grace period is over, a lender can impose charges as they see fit.
• Co-signer: A co-signer is like a co-borrower. This is an individual who signs your loan agreement with you and assumes liability in case you default on your personal loan contract.

5 Essential Factors to Consider Before Applying for a Personal Loan

You should ask yourself several questions during the personal loan application process. The answers you provide will not only help you select a suitable loan but also a lender that understands your needs. These include:

1. Secured vs Unsecured Loans

Personal loans can come as secured or unsecured loan types. Secured loans involve putting an asset as collateral for a specific loan amount, while unsecured loans don't have any property against which the lender can obtain in case you default.

As a result, secured loans are easier to obtain as the lender is confident that they will still be compensated even if you fail to repay their loan. You're also likely to access higher loan amounts with lower interest rates with secured loans.

2. Additional Rates and Fees

Some lenders charge additional fees like sign-up or origination fees on top of the interest rate, while others don't. An origination fee is usually a one-time payment that the lender subtracts from your loan to cover administrative and operational costs.

The amount often ranges from 1% to 5% depending on the lender, but others also charge a flat rate fee. For example, if you request a $10,000 loan with a 5% origination fee, you would receive $9,500 only as $500 goes back to the lender. It's always advisable to steer clear of lenders with origination fees, where possible.

3. Credit History

Your credit history is an element most lenders look at when approving and rejecting loan applications. Even if you're lucky enough to find a financial institution that will lend you money with a bad credit score, the loan usually comes with high-interest rates.

A good credit score shows lenders that you make timely payments to your credit obligations. As such, you may get an excellent loan amount with a favourable interest rate and terms of loan repayment. So, before applying for a loan, ensure you have a good or excellent credit score ranging from 600 to 750. Any figure below that may get you unfavourable loan terms.

4. Ability to Repay the Loan

Will you be able to repay the loan within the stipulated time? Before obtaining a personal loan, it is essential to plan the repayment details early to ensure your income is sufficient to cover the loan plus other debts and expenses. You can use a personal loan calculator to determine the equated monthly instalment (EMI) you must pay.

5. Lender's Trustworthiness

There are numerous lenders out there today running gimmicks. For example, some initially offer low-interest rates depending on the floating rates, only for the loan amount to become more expensive in the long run. Always conduct due diligence on a lender before committing your financial life to ensure they're a transparent bunch.

Apply for a Personal Loan Today!

At Better, we know how frustrating it can be when your finances hold you back from achieving your goals. Now that you have a better understanding of the ins and outs of personal loans, get in touch with the team to get your application started today, and get one step closer to ticking off those goals.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.