How Does a Bank Loan Work?

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your guide to bank loansIf you’re not sure how bank loans work, we’ve got some answers for you. While every bank has its own way of doing things, there are some basic features many personal loans have in common.

Applying for a loan at a bank

The very first step is filling out an application. Sometimes you have the option of applying in person, online, or over the phone. Before you apply, check that you meet the eligibility requirements. Some banks have applicant guidelines such as these:

  • Must hold an account at that bank
  • Must be 18 or older and a U.K. resident
  • Must meet a minimum annual income

Your credit history will also play a role in the bank’s decision to extend credit to you, and may affect your loan’s APR. (APR stands for “annual percentage rate,” and is an indication of how much the bank is charging you in interest.) In general, the better your credit, the lower your interest rate.1 Commonly, when you apply for a loan, you can choose how much you want to borrow and how many months or years you would like to repay for. Some banks may advertise a minimum repayment period of a year or more, but these days you’re often allowed to pay off a loan early without penalty.2

Interest rates and repayment schedules

After you’ve applied, the bank will review your information. If your application is accepted, they will quote you an interest rate before you sign the loan agreement.All banks post a representative APR on their websites, but not every applicant qualifies for that exact rate. Once you know the interest rate you qualify for, it’s a good idea to plug it into a loan calculator (many banks have them available on their websites) to make sure the total cost of credit is affordable for you. Personal loans typically have a fixed repayment schedule, so you can easily evaluate whether you can work the monthly repayments into your budget.1 If you agree to the terms the bank offers you, the next step is to sign the loan agreement. Afterwards, the bank will pay you the agreed-upon loan amount in one lump sum, and you will make the agreed-upon repayments.

The many faces of borrowing

There are many types of bank loans available. Personal loans, or unsecured loans, are not backed by your personal assets, which makes them riskier for the lender. As a result, unsecured loans tend to have higher interest rates.1 Secured loans, on the other hand, are backed by your assets, like your car or home. They are less of a risk for lenders, but borrowers run the risk of having their property repossessed if they are unable to make repayments. In short, there are lots of borrowing options out there, which means you have the freedom to do some comparison shopping to find the loan you’re looking for at the best price.

References

1Sainsbury’s Bank. (2014, 4 January). Sainsbury’s bank guide to personal loans. Retrieved 9 May 2014 from https://www.sainsburysbank.co.uk/library/default/pdf/loans-guide-to-personal-loans.pdf
2The Money Advice Service. (n.d.). Personal loans. Retrieved 9 May 2014 from https://www.moneyadviceservice.org.uk/en/articles/personal-loans

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Jennifer G. is a Social Media Associate at Enova International, Inc., and is interested in finding new and creative ways to be financially savvy.

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The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.