There are a lot of things that you need to know and understand about bank loans and personal loans before you even seal a deal. As a borrower, it is your responsibility to ensure that you are fully knowledgeable of the pros and cons before making any transaction — or for in this case before you apply for a loan.
According to a popular finance blog site, GO Banking Rates, a bank loan refers to “a sum of money you borrow from a bank or a credit union“. Meanwhile, in an article by The Economic Times – Wealth, it defines a personal loan as “an unsecured loan taken by individuals from a bank or a non-banking financial company (NBFC) to meet their personal needs. It is provided on the basis of key criteria such as income level, credit and employment history, repayment capacity, etc.”
You see, the two terms have different definitions, but one thing they have in common is that they both have something to do with borrowing or loaning money from a financial institution.
We just wanted to say that borrowing money is not a bad thing at all. In fact, probably all of us – in one way or another – have gone through or will go through borrowing money at a certain point in our lives.
Yes! Even well-off people borrow money. And as we have said, there is totally nothing wrong about it! What makes it wrong is when you borrow or loan money from someone or from a financial institution like banks and credit unions, and you do not pay for it.
Now, if you are new to this, we find it vital that you should be knowledgeable about where you’re getting yourself into. You have to know what bank loans and personal loans are all about as this will help you make better decisions.
Having said that, you no longer have to go elsewhere because we are going to share with you some essential information about bank loans and personal loans.
Particularly, we are going to tackle the following:
- Are bank loans and personal loans the same?
- What is a bank loan?
- How does a bank loan works?
- Who can apply for a bank loan?
- What are the pros and cons of a bank loan?
- What is a personal loan?
- How do personal loans work?
- Who can apply for a personal loan?
- What are the pros and cons of a personal loan?
- What other entities offer personal loans?
ARE BANK LOANS AND PERSONAL LOANS THE SAME?
First thing first.
Perhaps you are wondering – are bank loans and personal loans differ from one another or are they the same thing?
Technically speaking, a personal loan is just one of the many forms of bank loans. The term bank loans basically refer to personal loans, credit cards, home equity loans, small business loans, and many other forms of loans that the bank provides.
But to give you a more comprehensive explanation here’s what bank loans and personal loans are all about.
Before we move on, know more about personal loans by checking the below video by Keder Cormier who tackled basically all the basics you need to know about this type of bank loan.
WHAT IS A BANK LOAN?
Bank loans refer to one of the most popular forms of finance both for personal or business use.
It is generally a quick and upfront way of securing the funding needed. Bank loans are also typically provided over a fixed period of time.
Bank loans can either be short or long term depending on the purpose of the money borrowed from the entity.
Bank loans usually come with certain costs. Apart from the interest, it also comes with other fees and charges depending on the type of loan, and the lending institution. Thus, it is always best to check with the bank first regarding fees and charges applicable so you get to assess whether it’s worth it or not.
HOW DOES A BANK LOAN WORKS?
How bank loans work is quite similar to how personal loans work as well. After your application, the bank will do a review particularly with your credit score, history, as well as your income to be able to determine the amount of money that you can borrow, as well as the annual percentage rate you are qualified for.
Just like personal loans, bank loans are payable in installments or monthly at a fixed amount. Normally, bank loan repayment terms range from one to five years.
WHO CAN APPLY FOR A BANK LOAN?
Bank loans and personal loans’ requirements vary from one bank to another, which is why it is highly recommended to always check the bank you are eyeing for.
However, one of the most common requirements when it comes to bank loans is that the borrower has to have good or excellent credit. In addition, multiple years of credit history, as well as debt-to-income ratio will also be taken into consideration.
If you are in doubt whether you will qualify for a bank loan or not, we suggest you look for ways to improve your credit score, or you may also consider looking for a co-signer or better yet, apply for a secured loan instead.
WHAT ARE THE PROS AND CONS OF A BANK LOAN?
Bank loans and personal loans do have their respective pros and cons. Here are some of the advantages and disadvantages of bank loans:
- You may apply in person and be guided by a loan officer. Unlike other places where you can borrow money from, bank loans require you to apply in person, which is good as you can also take advantage of discussing the loan and be guided with and by a loan officer.
- Applying a bank loan where you have an existing account may lead to better terms and access. Ideally, you must apply for a loan from a bank where you already have an account. This will also give you more chances of getting approved.
- They provide competitive rates. Bank loans offer competitive rates especially if you have good credit standing.
- You may avail of a bank loan regardless of purpose. Bank loans allow you to borrow money regardless if it’s for personal or business purposes.
- It comes with fixed monthly rates and payments. Just like personal loans, bank loans do offer fixed rates and payments too depending on what the bank approved of.
- Credit requirements may be higher. The bank is quite strict when it comes to requirements. More so, when it comes to credit scores. So, before you apply for a bank loan, it is always best to check whether you are eligible or not.
- Bank loans may need you to do a lot of paperwork. As mentioned, banks are quite strict, which also means it may require you to do a lot of paperwork.
- Bank loans tend to have a longer waiting time. Unlike credit unions and online lenders, bank loans tend to have longer waiting times. So, if you need money right away, bank loans may not be ideal.
- There may be higher rates and fees. It’s already a given fact when borrowing money from banks. They really have higher fees and rates as compared to credit unions as well as online lenders.
WHAT IS A PERSONAL LOAN?
As mentioned earlier, a personal loan basically refers to the money that a person borrows from a financial institution, and pay back over time with corresponding interest.
It’s probably safe to say that a personal loan is one of the most accessible loans available in the market today. Unlike other forms or types of loans, a personal loan can be used for almost any purpose.
Personal loans are paid back in fixed monthly payments, or installments over a particular period of time — some may last for just a year, while some may even take up to seven years. How long a borrower pays off a personal loan will depend on certain factors set by the lender.
With regards to the interest rate, it varies depending on the financial institution where you borrow or loaned the money from. However, based on our research, we found that personal loans offered by banks tend to have higher interest rates as compared to most credit unions as well as online lenders.
As stated earlier, personal loans are usually “unsecured” loans, which means, the bank or any lending institution for that matter lends money without requiring collateral. Personal loans are not backed by collateral, which is precisely why unsecured loans tend to have higher interest rates also as compared to secured loans or loans that are backed by an asset or property.
HOW PERSONAL LOANS WORK?
Part of understanding what bank loans and personal loans are is knowing how personal loans actually work.
You know, when you are in a situation wherein you need money to pay for a specific need, there are actually a lot of ways to get or borrow cash. One very popular means is through credit cards. However, there is one option that comes with specific advantages, and that is a personal loan.
Unlike credit cards, personal loans let you borrow a predetermined amount of money. It also comes with fixed-rate, and also, a fixed repayment period, which makes life easier for you as a borrower.
Personal loans also come with fixed monthly payment depending on what you have agreed upon with your lender — in this case, with the bank. This is absolutely favorable because it makes budgeting a whole lot easier.
Depending on the borrower’s creditworthiness, personal loan interest rates may come lower as compared to credit cards. In fact, personal loan interest rates may go as low as 4% APR for those with good or excellent credit. The case is the total opposite though for those who have bad or those who don’t have a credit score at all. Usually, the APR is higher.
As mentioned earlier, personal loans are unsecured loans, which means collaterals are not needed. Needless to say, you can apply for a personal loan regardless of the purpose of getting the loan.
WHO CAN APPLY FOR A PERSONAL LOAN?
Generally, the requirements vary from one financial institution to another — or in this case, from one bank to another. However, some of the most common requirements when applying for personal loans are as follows:
• Must be a U.S. citizen or U.S. resident cardholder
• Must be 18 years old and above
• Must have a valid U.S. bank account
• Employment details
• Your monthly/annual income
• Proof of identification
But apart from the above-mentioned, there is one very important requirement that is taken into consideration when applying for bank loans and personal loans – that is your credit score.
A credit score is vital especially if you want to have a lower APR. When obtaining a personal loan via bank loans, the higher your credit score is, the lower the interest rate will be. The lower your credit score becomes, the higher your interest rate will get.
WHAT ARE THE PROS AND CONS OF A PERSONAL LOAN?
This time around, we are going to tackle the pros and cons of getting a personal loan. This will help you in making decisions, at the same time, so you can assess if personal loans are the best type or form of the loan according to your needs and preferences.
- Personal loans can be used for almost anything and everything. Unlike mortgages, car loans, student loans, and others, personal loans are nothing specific. This basically means you can use it for any purpose — whether it be as simple as you want to buy an expensive item for your home or you want to use it in opening a business.
- It does not need any collateral. As mentioned, personal loans are unsecured loans, thus, there is no need for any collateral. Having said that, personal loans are the perfect choice for those who do not have anything of value but needs to borrow money from a financial institution.
- You can loan any amount of money. Usually, personal loans range from $1,500 up to $100,000, which means you can borrow a lot more from personal loans as compared to credit cards.
- The rates are quite reasonable. The thing with bank loans and personal loans is that the rates are quite reasonable given the benefits you’ll get from it. One secret when applying for a personal loan through banks is to always compare rates before settling in.
- Personal loans give you plenty of time to pay. Unlike other forms of loans, personal loans have more flexible paying terms. You can pay a loan for a year or opt to pay it up until seven years.
- Personal loan payments are fixed. Generally, a personal loan has fixed payments, which you need to pay on time. If the loan in unsecured, failure to pay may lead the bank or any financial institution for that matter to take legal actions against you.
- Unsecured personal loans may have higher rates. This is more evident to those who have lower or poor credit.
- There may be fees and penalty charges. Many personal loans charge an origination fee, as well as prepayment penalties. Make sure to check these first before you apply for a loan.
WHAT OTHER ENTITIES OFFER PERSONAL LOANS?
So, what if you find a bank loan is not ideal for you. Where to borrow money from?
Well, there are two other options where you can borrow money from. One is through credit unions, and the other is through online lenders.
Let’s go through these two quickly –
Credit unions are member-owned, not-for-profit financial institutions. Compared to banks, credit unions are known to give better rates when it comes to personal loans. However, to be able to borrow money from credit unions, one has to be a member first. By the way, being a member means you are a part-owner as well, which also allows you to enjoy different privileges.
Online lenders, meanwhile, refers to creditors who operate entirely online. Compared to banks, online lenders are quite new. However, it has grown over the years. One reason is that it’s very convenient. Also, online lenders are not as strict as banks. They actually lend money even to those with low or poor credit — but of course, for a higher APR. What makes online lenders really popular these days is the fact that they provide approval just minutes after an application is submitted.
Online lenders’ interest rates may be a bit higher though as compared to some banks and credit unions. But then again, if you need funds soonest, this is the best place to borrow money from.
FINAL THOUGHTS ON BANK LOANS AND PERSONAL LOANS
A lot of people are quite confused about the difference between bank loans and personal loans, which is acceptable because sometimes these terms are really confusing especially if you are new to all these. Hopefully, we have given clarity on that.
With all the information we provided, hopefully, by now, this gives you more ideas about both bank loans and personal loans. Also, if personal loans or bank loans fit you. As we mentioned, as a borrower, it is our obligation to ensure that we qualify for a certain type of loan before we apply for one – this is to avoid wasting both time and effort.
So, do you think you qualify for a bank or personal loan?