What is personal loan and how to get one

You can access a lump sum of money from a bank, credit union, or online lender, which is then repaid over time in fixed installments. Here’s a clear breakdown of how they work:

1. Application

You apply through a lender (bank, credit union, or online platform). The lender reviews your credit score, income, employment history, and debt-to-income ratio to decide if you qualify.

2. Loan Approval & Terms

• If approved, the lender specifies:
  • Loan amount (the lump sum you’ll receive).
  • Interest rate (fixed or variable).
  • Repayment period (usually 1–7 years).
  • Fees (such as origination fees or late payment penalties).

3. Disbursement

• Once accepted, the loan amount is deposited directly into your bank account.
• You can use it for various purposes: debt consolidation, medical bills, home improvements, or personal expenses.

4. Repayment

• You repay the loan in monthly installments that include both principal and interest.
• Payments are fixed if the loan has a fixed interest rate, making budgeting easier.
• Missing payments can hurt your credit score and lead to extra fees.

5. Loan Completion

• Once all installments are paid, the loan is closed.
• Paying off early may save on interest, but some lenders charge prepayment penalties.

How Interest Is Calculated

Interest is the cost of borrowing money or the return on lending money, and it is calculated based on the principal (the amount borrowed or invested), the interest rate, and the time period. There are different methods of calculating interest, but the two most common are simple interest and compound interest.

1. Simple Interest

• Formula:

Where:

• P = Principal (amount borrowed or invested)
• R = Interest rate (per year)
• T = Time (in years)
• Example: Borrowing ₦100,000 at 10% per year for 3 years:

Total repayment = ₦100,000 + ₦30,000 = ₦130,000

2. Compound Interest

• Formula:

Where:

• P = Principal
• R = Annual interest rate
• n = Number of compounding periods per year
• T = Time (in years)
• Example: Borrowing ₦100,000 at 10% per year, compounded annually for 3 years:

Total repayment = ₦133,100

Read: How to Register for CIBC Online Banking and Mobile

Secure vs. Unsecured Personal Loans

Personal loans are broadly divided into two categories: secured and unsecured. The main difference between them lies in whether you provide an asset (collateral) to back the loan. Understanding this distinction is important because it affects your interest rate, risk level, and eligibility.

Secured Personal Loans

A secured personal loan requires you to pledge an asset as collateral. This could be something valuable, such as a car, savings account, fixed deposit, or property. The collateral acts as security for the lender—if you fail to repay the loan, the lender has the legal right to take and sell the asset to recover the money.

Because the lender takes on less risk, secured loans usually come with lower interest rates and may allow you to borrow larger amounts. They can also be easier to obtain if your credit history is limited or not very strong.

However, the major downside is the risk involved. If you miss payments or default on the loan, you could lose your asset. For this reason, secured loans require careful planning and confidence in your ability to repay.

Unsecured Personal Loans

Unsecured personal loans do not require any collateral. Instead, lenders rely on your creditworthiness, income, and financial history to decide whether to approve your loan.

These loans are more common and more accessible, especially for everyday needs like emergencies, travel, or bill payments. The application process is often faster, and you don’t risk losing personal property.

The trade-off is that unsecured loans usually come with higher interest rates compared to secured loans. Lenders may also impose stricter eligibility criteria, especially if you have a low credit score or unstable income.

How to Qualify for a Personal Loan

Qualifying for a personal loan means meeting the lender’s requirements so they feel confident you can repay. While exact criteria vary by bank, credit union, or online lender, here are the main factors that determine eligibility:1. Maintain a Good Credit History.

1. Credit Score

• Lenders check your credit history to assess reliability.
• A higher score (usually 650+) improves chances of approval and lowers interest rates.
• Poor credit doesn’t always mean rejection, but it may lead to higher rates or require a secured loan.

2. Income and Employment

• Proof of steady income (salary, business earnings, or other sources) is required.
• Lenders want assurance you can handle monthly repayments.
• Employment stability (e.g., being with the same employer for a while) strengthens your application.

3. Debt-to-Income Ratio (DTI)

• This measures how much of your income goes toward existing debts.
• A lower DTI (ideally below 40%) shows you have room to take on new debt.

4. Collateral (for Secured Loans)

• If applying for a secured personal loan, you’ll need to pledge an asset (like a car, house, or savings account).
• Collateral reduces lender risk and can help you qualify even with weaker credit.

5. Documentation

• Common documents include:
  • Government-issued ID
  • Proof of income (pay slips, tax returns, or bank statements)
  • Proof of residence (utility bill, lease agreement)
• Accurate paperwork speeds up approval.

6. Loan Purpose

• Some lenders ask why you need the loan (e.g., debt consolidation, medical bills, home improvement).
• While personal loans are flexible, clear purpose reassures lenders.

Read: The 5 Cs of Credit Explained

How to Get a Personal Loan

Getting a personal loan involves a series of steps where you apply, qualify, and then manage repayment. Here’s a clear guide:

1. Assess Your Needs

• Decide how much money you need and why (e.g., debt consolidation, medical bills, home improvement).
• This helps you choose the right loan type and amount.

2. Check Your Credit Score

• Your credit score influences approval and interest rates.

• Higher scores (650+) usually mean better terms.
• If your score is low, consider improving it before applying or look into secured loans.

3. Compare Lenders

• Explore banks, credit unions, and online lenders.
• Compare interest rates, fees, repayment terms, and customer reviews.
• Some lenders specialize in quick approvals, while others offer lower rates.

4. Gather Documentation

• Common requirements include:
  • Government-issued ID
  • Proof of income (pay slips, tax returns, or bank statements)
  • Proof of residence (utility bill, lease agreement)
• Having documents ready speeds up approval.

5. Apply for the Loan

• Submit your application online or in person.
• Provide accurate details about income, debts, and loan purpose.
• The lender will run a credit check and review your financial profile.

6. Review Loan Offer

• If approved, you’ll receive loan terms:
  • Loan amount
  • Interest rate (fixed or variable)
  • Repayment schedule (monthly installments)
  • Fees (origination, late payment, or prepayment penalties)
• Read carefully before accepting.

7. Receive Funds

• Once accepted, the loan amount is deposited into your bank account.
• You can then use it for your intended purpose.

8. Repay the Loan

• Make monthly payments on time to avoid penalties and protect your credit score.

• Consider setting up automatic payments for convenience.
• Paying extra when possible can reduce interest costs.

Final Thoughts

Getting a personal loan is straightforward, but making the right choices along the way is what truly matters. Borrow only what you need, understand the terms fully, and ensure repayment fits comfortably within your budget. A well-managed loan can support your financial goals, while a poorly planned one can create long-term challenges.