A personal loan is a contract through which a financial entity (lender) advances an amount of money to another (borrower), with the obligation to repay the said advance, the previously agreed interests, and the possible expenses incurred by said operation.

Requesting a loan is a widespread solution to face unexpected expenses, financial emergencies, or other specific expenses that exceed your ability to pay at the moment. Personal loans are an easy alternative to obtain without many procedures or requirements to pay debts, buy assets or even travel. Here we tell you how they work and what their characteristics are.

How does A Personal Loan Work?

Personal Loan Work

The bank gives you a fixed amount of money all at once, with the condition that you return that same amount in the medium term, adding the agreed interest. You can pay off your debt in single or periodic payments (instalments).

Some banks use the credit scoring system to evaluate if you can pay the requested amount. According to your evaluation, they determine if they will give you a personal loan and at what interest rate. Depending on the credit history, the interest rates of personal loans can vary a lot. For the same reason, it is recommend to apply for a loan only when you are sure of your ability to pay.

Types of Personal Loans

Among the existing types of personal loans, the following relationship should be a highlight:

  • Consumer credit.
  • Quick loans.
  • Student loans.

Characteristics of Personal Loans

The main characteristics of a private loan are as follows:

  • The principal sum generally does not exceed 30,000 euros.
  • They are usually not associated with bank guarantees or material guarantees.
  • Commercial banks grant them.
  • You are lock into a higher interest rate.
  • Their goal is to buy goods like a car or a computer.
  • The personal loan is almost always intend for consumption.
  • The return period remains usually short/medium term.
  • It is usually link to the opening and cancellation commissions.

Where to Apply for A Personal Loan?

Personal loans can be request from any bank. Whether you are a customer or not, a being meeting the conditions set by the bank can apply for a personal loan and also, provide the documentation required by the staff in charge of the study.

However, there are many other companies that we call financial companies dedicated to providing personal credit and offer requirements that are significantly lower than what the market demands. These companies charge these customers a much higher interest rate than a finance company, even without being a customer.

Reasons to Apply For a Personal Loan

Among the reasons for applying for a personal loan, we have highlighted many very different ones.

However, application for personal loans are generally made to purchase a vehicle, a home renovation, the purchase of a computer, the payment of the communion of a child, a wedding, and also, the price of the girl’s studies, among others.

In short, it is a type of loan designed to pay for goods and services at a moderate cost.

Requirements for Applying for A Personal Loan

The requirements for applying for a personal loan include:

  • He is usually of age.
  • Be a bank customer.
  • Budget or pro forma invoice of the creation or service you intend to purchase with the loan.
  • Hereditary relationship. In other words, a so-called declaration of assets.
  • Declaration of past income.
  • Demonstrate creditworthiness through collateral or income, proving the creditworthiness of the loan.
  • Respect the conditions required by the bank.
  • A specific interest rate must be agree upon with the company.
  • The opening commission and, if applicable, the study commission must be paid.

What Can A Personal Loan be use For?

Personal loans can be use for a large number of household expenses. Some standard services are:

Unexpected Expenses and Emergencies

Not everyone has money saved for emergencies. If you need to pay for an emergency, a personal loan can save you from trouble. You can pay for vet bills, urgently needed car repairs, or any other unexpected expense with it.

Large Purchases

If you want to make a large purchase, it may be tempting to pay for it with your credit card. However, if producing for your purchase will take you months, it may be that a personal loan turns out to be cheaper. So you can pay for that new washing machine, fix up your house, or even take a family vacation at a lower interest rate.

Debt Consolidation

If you owe your credit card, you’re not alone. More than 170 million people are living in the US. They have credit cards. Credit card debt can be very expensive, especially if you’re lock into a high-interest rate. And with variable interest rates and also, terms, it can be difficult to predict your monthly credit card payments. By paying these debts with a personal loan, you can group your debt into an individual and predictable payment plan, with the opportunity to do so with an interest rate that is more suitable for you.

Home Improvements and Repairs

If you want to renovate your home or pay for an expensive repair, a personal loan can help you do it. Unlike home equity loans, personal loans don’t require your home to be collateral.

Money Owed to Family or Friends

In tough times, you might borrow from family or friends. Although we all need this kind of support from time to time, it can be uncomfortable. With a personal loan, you can cover your debt and relieve the tension or stress you feel due to that situation.

All though, as you can see, personal loans are helpful in many different situations. First, they are a natural way to reduce financial stress when something unexpected happens.


Financial institutions offer personal loans for a certain amount of money immediately. The applicant must pay the amount borrowed together with the related interest that has been generat.

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