A personal loan is a god send for those who need urgent cash to fulfill their unforeseen cash requirements in their day to day lives. While applying for the loan amount is extremely easy, it is also equally important to understand the working of these loans.
Kinds Of Personal Loans
There are two kinds of personal loans: variable interest rate loans and fixed interest rate loans.
• Variable interest rate loans: These loan amounts have an interest rate that can change during the loan term. This change affects the personal loan repayment installments. This change can take place several times throughout the life of the loan. With such loans, the borrower is allowed to make early or additional repayments without any sort of penalty.
• Fixed interest rate loan: Here, the loan interest rate remains the same for the entire loan term. The loan installments do not alter even with the interest changes that take place due to any fluctuations in the economy. One cannot pay extra or pay before the set date. In case he wishes to do so, he would have to incur extra charges for all the additional payments made.
The above was a brief insight into the kinds of personal loans. Let us now see the various terms associated with personal loans.
Personal Loan Term Explanations
• Drawdown: A drawdown occurs when the loan funds are made available to the borrower. This happens when the funds are deposited into the nominated account. Once the funds drawdown, the interest rate starts to accrue.
• Redraw: The redraw facility enables the borrower to access additional repayments on a variable interest loan rate. Here the borrower would also have to submit a redraw fee to facilitate the process.
• Fees and charges applicable: Once the personal loan is approved, the borrower would also have to incur a loan approval fee that would be added to the total amount of the loan.
• Interest calculation: The interest rate of the loan is calculated on the unpaid daily balance of the loan and is charged on a monthly installment basis. The rate applied on each day is equal to the annual interest rate applicable at that time and is then divided by 365. One must be also be aware of the fact that the monthly installment can vary between the months because the interest rate is dependent on the number of days in a month.
• Repayment calculations: The repayments are calculated on the total amount of the loan, the applicable fee, the APR and the loan term. One would also have to incur an early repayment charge in case he wishes to repay the entire loan before the end of the loan term. The loan repayment schedule would be established right at the commencement of the loan. It may be repaid weekly, fortnightly or monthly. However, monthly installments are preferred by most borrowers.
• Making repayments: One can make his personal loan repayment via direct loan repayment, direct debit from the debit card, phone banking, Internet banking or through electronic transfer.
• Change in repayment dates: If the borrower holds a variable interest rate loan, then he has the option of changing the repayment date at any time during the life of the loan. But if he holds a fixed interest rate loan, then the loan repayment dates cannot be changed.
• Late payments: Late payments are made with a late payment fee. The fee would be charged on the borrower’s default account each day till the entire outstanding amount is repaid.
The working of all personal loans is not as simple as it seems. It would be better if one reads the terms and conditions properly before signing on the dotted line. Also remember to compare the quotes of a few lenders so that you can get the best deal.