A personal loan is a loan for the purchase of various kinds of goods and services that satisfy human needs. For example, these are student loans, car loans, real estate loans, etc. In most cases, such loans are issued in cash or by using a credit card. But you should remember that personal loans are subject to fairly high interest rates.
Such loans, in addition to the stated interest, are very often accompanied by the payment of additional fees and commissions, which can significantly increase the cost of using credit funds for the borrower. Thus, the so-called effective interest rate is formed, which consists of the nominal (i.e. declared by the bank), as well as additional payments in the form of various commissions. Therefore, in order for the increase in interest not to become an unpleasant surprise for you, you must first check with the bank employee whether there are such additional fees in the contract. You should also remember that banks must inform borrowers of the effective interest rate.
Today, in the face of increasing demand for personal lending, many banks significantly soften the terms of such loans for their clients. So, there are organizations that offer online loans or require a minimum set of documents.
What are personal loans?
There are two main types of personal loans. These are targeted and non-targeted loans. Targeted loans imply the use of credit funds for strictly defined purposes and spending on them is carefully controlled by the bank, but the money you received on the terms of non-targeted lending is at your complete disposal and does not require reporting to the lender. However, the disadvantage of non-targeted loans is the higher interest rate.
There are many other criteria by which personal loans are classified. For example, they can be divided into long-, medium- and short-term.
Also, one of the forms of personal lending is the installment plan.
Pros and cons of personal lending
Personal loans have both significant advantages and disadvantages. The main advantages of using personal loans are:
- the ability to purchase a product or service directly at the moment when it is most relevant or convenient, without the need to accumulate funds for a long time to purchase;
- the ability to avoid an increase in the price of a product;
- the convenience of payment for the purchase since you can pay for it not immediately but for a certain period of time and in small amounts.
The main disadvantages of such lending are the overpayment for the purchase in the form of an interest rate for the use of credit funds. This overpayment may turn out to be even greater than anticipated if the bank conceals the presence of additional commissions and fees. Another disadvantage of personal loans is the fact that the initial satisfaction from a new thing acquired through a loan may pass faster than the actual term of its payment.
Alternatives to such loans
Alternatives to personal loans in Michigan are other types of loans, in particular:
- Borrowing from private individuals. This is the easiest option to make a purchase, which, however, has several significant disadvantages: an even higher interest rate, the possibility of facing fraudsters, as well as a simple debt collection scheme in court;
- Other types of bank loans. The most popular types are mortgage and car loans, as well as credit cards. Each of these methods has its own pros and cons and can be considered as a serious alternative;
- Payday loans online. In this case, the requirements for the client are even more relaxed, however, the interest rate on the loan is significantly higher.