Personal loans! We all know them!
Borrowing money from a financial institution at an agreed interest rate which is to be paid back over a specific period of time? Yes, that is how a personal loan is defined. Mainly used by people who are in need of immediate cash, a personal loan can be taken on for different personal reasons. Knowing everyone has different needs, we’ll guide you through the specifics of a personal loan. Key takeaways you will learn about:
Let’s have a look together!
As a consumer, you can apply for different types of personal loans, all of them with their own specific characteristics, benefits and potential downsides. Let’s run through the different alternatives together to make sure you’re fully prepared.
Firstly, it’s important to understand the difference between secured and unsecured personal loans. Secured loans can be taken by offering the financial service provider you’re borrowing from a collateral. This could be a car, property, land or anything else. The collateral builds trust and is making the loan more ‘secure’ for whoever is providing it. Therefore, secured loans will always be disbursed at lower interest rates. Unsecured loans on the other hand, do not require any collateral but they do come at higher interest rates. You may use these loans to purchase personal items like smartphones, motorcycle, furniture and appliances. On a side note, depending on your personal situation, it is best to consider the above first before applying. You might be able to save on interest rates!
Next to that, it is important to understand how the interest rates will be defined. Personal loan providers offer the option to take a variable interest rate loan as well as a fixed interest rate loan. The interest rate for fixed interest loans are fixed on a monthly basis. You will know exactly how much you will be paying over the course of your tenure.
Variable interest rate loans are tied to a benchmark rate determined by the loan providers and will vary on a monthly basis. This means the interest rates charged are different from month to month. You’ll then have to pay the interest depending on what the rates are when it’s time for your loan repayment. This type of loan may be available depending on your financial provider, but typically not commonly offered in Cambodia.
Knowing how interest rates work is key! The better of a deal you can get, the more money you will save on your loan. In simple words, interest rates are the cost you pay to the financial provider for them to lend you money. It is usually expressed in a percentage on top of the amount you borrow and is mostly referred to as a ‘per annum’ or ‘yearly’ interest percentage. This depends on the tenure of your loan of course.
Interest rates for loans are not to be confused with interest rates on other financial products such as credit cards where fixed interest rates are being applied to the full outstanding balance. In cases like these you may find the payable amount to decline as you repay your loan gradually.
Banks define interest rates based on various factors. It is perfectly normal for you to be offered a different interest rate for a specific loan than someone else in your environment. Ultimately it comes down to your personal risk profile and trustworthy the bank perceives you. The lower the risk, the lower the interest rate is likely to be.
It is important to pay attention to additional fees and charges that may be applicable. For instance, you may have to pay a stamp duty or processing fee charged as a percentage of the full amount of your loan. You may also encounter early termination fees when you decide to pay your loan off early. Additionally, some personal loans may be tied to an insurance policy, which will increase the amount of your loan. The best practice here is to run through the loan’s Terms and Conditions thoroughly with your issuer and make sure that you understand the clauses before signing off.
Lastly, check the requirements for the personal loan that you intend to apply for. Different personal loans have different unique requirements such as your minimum annual income, age range, nationality, employment status, or employment sector. Soon, your credit score and existing loans will also play an important role in getting the approval for a new personal loan. It is recommended to do research in advance, to not waste time applying for loans you are not eligible for anyway.
Personal loans can be useful at any point of time. Although it is a relatively easy access to short terms cash, we advise you to be aware of all terms and conditions before signing off. Make sure the loan fits into your existing schedule of expenses to make sure you always remain financially healthy. Think longer term rather than looking at the short-term benefits only.
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