How Does a Personal Bank Loan Work?

1. Introduction

   • A personal bank loan, whether it is secured or unsecured, is one way for an individual to improve her FICO score. In addition to securing money for a much-needed expense, successfully meeting the bank's underwriting requirements in order to obtain a loan can boost one's financial creditworthiness.

   Obtaining the Loan

   • In order to obtain a personal bank loan, one has to provide the bank with the necessary underwriting information. How much information to provide and how it's judged is a function of the current economic state. For example, in times of a recession, it's more difficult to obtain a personal bank loan than it is in times of a stable growing economy. Therefore, anyone looking to secure a personal loan must understand that the economy is a factor in determining whether or not the loan is approved.
     Personal bank loan underwriting information may vary from bank to bank, but one common factor is that the applicant must have a steady source of income, a relatively good credit report and an acceptable FICO score. The FICO score and credit history not only determines whether or not the bank will offer the loan, it also helps to set the interest rate for the personal bank loan. There is an inverse relationship between the FICO score and interest rate. A higher the FICO garners a lower interest rate while a low FICO score is penalized with a high interest rate.

   Loan Repayment

   • Personal bank loan repayment can span from 12 months to 30 years depending on the size and type of loan. Whatever the repayment terms, the applicant must take special care to read the fine print of the loan agreement. Clerical errors do occur and it's important to confirm the principal amount borrowed, the applicable interest rate and the amount of time to repay the loan.
     Once the loan is agreed to, the borrower must make monthly payments each month to pay off the loan. The monthly payments consist of principal (the original amount borrowed) and interest (the amount it cost to borrow the money). The sooner one repays the loan, the less interest incurred.

   Credit Reporting

   • Once an individual has secured a personal bank loan, the activity on that loan is reported to the credit rating bureaus. The way in which a borrower repays the loan can serve to either enhance or detract their FICO score. Consistent timely payments are a positive reflection of an individual's financial capabilities. If for some reason the borrower has to miss a payment or is late, it's best to contact the financial institution in an attempt to work out an arrangement to prevent negative reporting to the credit bureaus.

   Early Repayment Penalties

   • Since banks earn money from the interest on outstanding loans, some banks charge an early repayment penalty in the event the borrower pays of the loan ahead of time. Applicants should review the loan agreement to ensure they wont suffer early repayment penalties. If such a clause exists, negotiate with the loan officer to have it removed.

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Resources

• Personal Bank Loans

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