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What is a Personal Bank Loan
Published: 07/08/2010
A personal loan is typically a loan for items other than purchase of property like cars, boats or homes. It is for personal needs like school (though it’s not usually a student loan), unexpected expenses like medical emergencies, moving to another part of the world, or for large purchases like extensive vacations. It can also be for things like debt reorganization. When this loan originates from a bank it is called a personal bank loan.
The personal bank loan is often differentiated from credit card loans, even if they come from banks, because it’s typically for a set amount of money. Moreover, it’s not a revolving credit line, in most cases, in which people can keep borrowing if they pay off part of the loan. Instead, such a loan typically has a fixed interest rate and will be paid off in monthly installments of a certain amount over a fixed period of time.
Another important point to understand regarding the personal bank loan is these loans are typically unsecured. In most secured loans, the loan is secured by property like a house or car that can be repossessed if the loan is unpaid. Most personal loans by their very nature are unsecured, since they are for personal expenditures, which can’t exactly be seized.
This brings up two very important issues. First, most traditional banks won’t issue a personal loan unless a person has excellent credit. There are other lenders that may give personal loans to the not so creditworthy, but they will do so at very high interest rates. Even when a loan does issue from a bank and person does have good credit, because a personal bank loan is not secure it’s usually subject to higher interest rates. One way that people can avoid higher rates is to either borrow against their equity in a home, or to refinance their homes to take out the money they need. Alternately, getting a loan from a family member or friend might mean paying zero or lower interest; terms of repayment should be quite clearly defined to avoid any misunderstanding that may arise.
Up until the mid to late 2000s, most people with a good credit score could obtain a modest personal bank loan. This changed dramatically in the US with the bank crash that ushered in an economic recession. Credit score requirements for personal loans have been raised, and usually a good credit score is now considered about 700. This can make getting loans from traditional lenders like banks hard to do. As mentioned, there are other lenders, but people should definitely consider interests rates, loan origination fees and other fees and penalties.
For those with excellent credit, it is still possible to obtain a bank personal loan, and people might have more than one bank anxious to lend them money. When this is the case, it’s important to compare interest rates, loan origination fees, additional charges and any penalties that apply if a payment is skipped or isn’t made on time. This can help people determine which loan is the best one.
