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FirstCapital Bank of Texas

Personal Loans and You

The best things in life are free: For everything else, there are personal loans. Personal loans are a great solution to your borrowing needs, whether it’s for a car, a new home or renovation, or other large purchases. Personal loans are very versatile, but they can also be a little confusing. Here are some personal loan facts and tips to get you started:

  • How do personal loans work? Most personal loans are installment loans. That means you borrow—and owe—a fixed amount of money over a specific period of time. The exception are personal lines of credit, which function similar to credit cards, meaning you make principal and interest payments only on the amount you use, and those payments replenish your overall credit availability.
  • Secured vs. Unsecured. Secured loans are backed by collateral, which is property you own, like a home, car, or savings account, that is at least equal to the amount you owe and must be surrendered if you fail to pay your loan. Unsecured loans don’t require any collateral and approval is based solely on the lender’s decision. (The interest rates on unsecured loans are usually higher.)
  • Does it cost anything to open a personal loan? Some lenders charge an origination fee, which is considered their cost to process the loan. Lenders may also have a prepayment penalty, which actually charges you a fee for paying your loan off early, as this means they don’t get as much interest from you. It’s important to consider these factors when choosing a lender.
  • What are the interest fees? Depending on your credit score and where you get your loan, you can expect to pay anywhere from a five- to 36-percent (or higher) interest rate. To put that into perspective, if you owe $10,000, your interest can range from $500 up to $3,600—that’s a $3,100 difference! You should also read the fine print on loans that offer zero percent interest for the first 12 or 18 months. Often these loans have higher interest rates after the introductory period has ended and may cost you more in the end.
  • Ask about ways to save. Check with your financial institution to see if they offer discounted rates for customers. Many lenders will also offer rate discounts if you enroll in automatic payments—just make sure you have enough money in your account to cover the payment or you could be looking at overdraft and late payment fees, plus a potential interest rate increase.

Personal loans are a great solution to a variety of financial needs. Now that you understand how these loans work and what fine print you need to be on the lookout for, you’re ready to take the next step and find a trustworthy lender.