A personal bank loan is a type of loan that banks offer. It gives people a lump sum of money that they have to pay back over a certain amount of time. Personal bank loans can be used for many things and are an alternative to credit cards and home equity loans as a way to get money. This complete guide will tell you everything you need to know about personal bank loans, such as how they work, what they can be used for, who can get them, and how to apply.
How a Personal Bank Loan Works
A personal bank loan is a type of installment loan, which means it is repaid through fixed monthly payments over a predefined period of time. Here is a quick overview of how a personal bank loan works:
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You apply and are approved for a specific loan amount based on your creditworthiness and income Loan amounts often range from $1,000 to $100,000
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After approval, the bank will deposit the loan amount directly into your bank account, minus any origination fees
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You will make fixed monthly payments to the bank consisting of principal plus interest until the loan is fully repaid. Terms are usually between 1 to 7 years.
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As long as you have the loan, the interest rate will stay the same, so your monthly payments will stay the same.
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Most personal loans from banks are unsecured, which means you don’t have to put up any collateral. You qualify based on credit score, income, and debt-to-income ratio.
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Making on-time payments will help improve your credit score over time. Late or missed payments can negatively impact your credit.
Personal Bank Loans vs. Other Lenders
While banks are a popular source of personal loans, you may also be able to get a personal loan from online lenders, credit unions, or other financial institutions. Here is how personal bank loans compare:
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Rates of interest: Personal loans from banks tend to have higher rates than loans from credit unions, but they may be lower than rates from some online lenders.
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Availability: Banks may have stricter approval requirements regarding credit score and income compared to other lenders. Credit unions require membership.
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Loan amounts: Banks often offer higher maximum loan amounts than other lenders, sometimes over $100k for those with excellent credit.
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Speed: Online lenders can often fund loans faster than banks, sometimes within 1 business day after approval.
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Fees: Some banks charge origination fees while others do not. Compare fees across lenders.
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Customer service: Banks allow you to meet with branch staff if desired for assistance. Online lenders provide customer service via phone, email or chat.
Main Features of a Personal Bank Loan
While specific terms will vary by lender, here are some of the typical features of a personal bank loan:
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Fixed interest rate – Your interest rate will not change over the life of the loan. Monthly payments remain the same.
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Loan terms from 1 – 7 years – Longer terms mean lower payments but higher interest costs over time.
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Unsecured – No collateral required. Based on creditworthiness.
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Prepayment penalties – Some banks charge fees if you pay off loan early.
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Borrowing limits – Banks may offer loans up to $100k for those with excellent credit.
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Origination fee – Upfront fee deducted from loan amount. Typically 0% to 12% of loan amount.
Common Uses of a Personal Bank Loan
A key benefit of personal bank loans is that they can be used for almost any purpose. Here are some of the most common uses:
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Debt consolidation – Combine multiple high-interest debts into one manageable monthly payment.
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Major purchases – Use for expenses like home renovations, medical bills, or dream vacations.
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Life events – Cover costs for a wedding, adoption, or other major life event.
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Home improvements – Make upgrades and repairs without tapping home equity.
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Emergency expenses – Access funds quickly for unexpected bills or expenses.
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Investing – Use loan to invest in yourself through education or professional development.
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Vehicles – Finance an older used car, RV, or boat that doesn’t qualify for dealer financing.
Qualification Requirements
When applying for a personal bank loan, the lender will evaluate several factors to determine if you qualify. These generally include:
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Credit score – Minimum scores between 640 to 670 or higher often required for approval. Excellent credit scores over 720 will get better rates.
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Income -Stable and reliable employment income will improve chances of approval.
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Existing debts – Your debt-to-income ratio should demonstrate you can afford loan payment.
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Payment history – On-time payment history on credit accounts preferred. Late payments can hurt.
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Loan term – Shorter terms often qualify for better rates but have higher payments.
Meeting the lender’s requirements for these areas will provide you with the best chance for approval and lowest interest rate offered.
How to Apply for a Personal Bank Loan
The process of applying for a personal bank loan is straightforward and can often be done entirely online:
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Check your credit score and credit report – This gives you an idea of rates you may qualify for.
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Compare loan options from multiple banks – Accounts for different fees, rates, terms, and borrowing limits.
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Submit a loan application – Apps require personal, income, and employment information.
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Provide necessary documentation – Pay stubs, tax returns, or bank statements may be requested.
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Accept final loan offer – Pick the loan with the best rates, fees, and terms for your situation.
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Loan funds disbursed to your account – Minus any fees, funds available as soon as next business day.
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Begin making your monthly payments – Auto-deducted from your bank account based on repayment terms.
That covers the key steps in applying. With some preparation and shopping around, you can find the personal bank loan that best fits your needs and budget.
Frequently Asked Questions
What are the pros and cons of personal bank loans?
Pros: Fixed rates, predictable payments, fast funding, unsecured, improve credit score, multiple uses. Cons: Can have high interest rates, origination fees, prepayment penalties, strict approval requirements.
What credit score is needed for a personal bank loan?
Most banks want to see a minimum credit score between 640 and 670 for approval of a personal loan. Excellent credit scores above 720 will qualify for the lowest advertised interest rates.
How fast can I get loan funds from a personal bank loan?
After approval, your loan funds can be deposited into your bank account as soon as the next business day. This makes personal loans a good option when you need money quickly.
Should I get a personal loan or use a credit card?
Personal loans tend to have lower interest rates and fixed monthly payments compared to credit cards. However, credit cards offer more flexibility if you need to carry a balance or borrow money as needed.
How much can I borrow with a personal bank loan?
Loan amounts range from $1,000 to over $100,000. However, each bank sets their own lending requirements that determine the amount you can qualify to borrow based on factors like your income, credit score, and current debt obligations.
The Bottom Line
Personal bank loans provide an accessible way to access funds for a variety of needs through fixed monthly installment payments. When used responsibly, they can also help you consolidate high-interest debt, make important purchases, and boost your credit standing over time. By comparing options from multiple banks and lenders, you can prequalify and find the loan with the best rates and terms for your financial situation.
Secure vs. Unsecured Personal Loans
Secured loans require a form of collateral thats equivalent in value to the amount being borrowed. You can use assets like bank accounts, cars, and real estate as collateral. Because it reduces the credit risk, offering collateral can increase the chances of getting approved and may help you get a lower interest rate.
Unsecured loans are the most common type of personal loans. These arent secured and are generally based on your creditworthiness. Individuals with higher credit scores tend to have a better chance of qualifying for unsecured loans, but interest rates are often still higher compared to secured loans because the lender is assuming a greater risk.
Comparing Personal Loan Lenders
If you need a loan, it’s smart to look at what different lenders have to offer. Here are a few factor that you may want to take into account:
- Loan types, including secured and unsecured loans
- Requirements, such as credit scores and monthly income
- Different loan terms (or loan lengths) to choose from
- The interest rate on the loan per year, also known as the annual percentage rate (APR).
- Fees, like upfront and early payment charges, can make you owe the lender more money.
- Good customer service is important if you need to get in touch with the lender for any reason.