Personal loans are one of the most used financing methods by individuals. Whether to pay for a trip, a financial event, studies, repairs at home or any other type of commitment.

However, it is often unknown what exactly this type of loan is and what should be taken into account before requesting it. From Lenders we want to solve all your doubts so that you have everything clear.

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What is a personal loan?

We speak of a personal loan to refer to the contract that the financial institution signs with the client. Through this contract the bank or financial institution advances a capital (known as principal) to the borrower.

In return, the borrower agrees to return said principal in a specific period of time with previously determined interests.

These personal loans are also known under the name of consumer loans.

What should be revised to opt for one or another personal loan?

To know which personal loan or consumer loan is most suitable for our situation, we must assess the following aspects :

  • Interests. The financial institution that offers the loan will set an interest rate in exchange for this amount. When it comes to choosing one or the other loan, it is best to pay attention to the APR. Since the APR includes the calculation of both the nominal interest rate (NIR) and the commissions involved in the loan.
  • Possible commissions. Both opening and partial or total cancellation. Many times a consumer loan with a low nominal interest may be less attractive than another with a higher nominal interest if the former includes many commissions. It is therefore important to take into account the commissions in order to know which loans are actually the most profitable within the period of time we request for their return.
  • Associated expenses.
  • Deadlines for the repayment of the loan.
  • Total to pay for each of the monthly installments.

Be careful with the guarantees

The main difference between a personal loan and a mortgage is the element that the financial institution uses as collateral to offer this loan in case of default.

When we talk about consumer loans, the borrower offers all his assets as collateral. In other words, in case of default, the borrower must respond to the debt with all the assets he has, both present and future.

The risk for this reason is greater for the entity that loans the capital than with the mortgage loans. In this case, the borrower, in addition to offering a personal guarantee, uses the mortgaged property as an additional guarantee. In this way, in case of default, the bank will keep the house.

By assuming a greater risk of payment with consumer loans, the bank requests:

  • Higher interests
  • A lower repayment term.

Do not forget that in the face of default, you respond with what you have. And this can be a lot or a little. Therefore they are much more expensive and there is less time to return the capital. That is why it is so important to consider if we really have the economic capacity to meet payment deadlines.

To know our ability to pay, we must bear in mind that these fees, added to the rest of our loans (such as mortgages) should not represent an expense of more than 40 percent of our income. Otherwise it will be very difficult for us to make the payments.