How a Personal Loan Works – Everything You Need to Know

Personal loans are financial instruments in which a person (the lender) makes a loan for a certain amount of money to another person (the debtor) in which the debtor commits to pay back the original amount in addition to interest , and other costs associated with the loan in time or term defined according to the terms established for said loan.

The loan terms such as interest and term change according to several factors. Factors such as the amount being requested, the credit history of the debtor and other factors affect the terms of the loan. Depending on how qualified the person applying for the loan is, it may be easier or more difficult to get loans with the appropriate terms.

There are loans that check your credit record to determine your loan terms and there are other loans that do not check credit (especially financial loans that help people with bad credit). Remember to ask the lenders if they check your credit to know if they will do a “soft pull” as these do not damage your credit or a “hard pull” which can lower your credit score.

What is the annual interest or APR?

What is the annual interest or APR?

The annual interest or APR is the sum of the interest plus extra charges, calculated on an annual basis translated into a percentage. The annual interest depends on when the amount is borrowed, the duration of the loan and the extra charges.

The formula to get the annual interest is the following:

  1. Divide the cost of financing by the amount of the loan.
  2. Multiply the result by 365 (To get the annual interest).
  3. Divide the result for the term of the loan.
  4. Multiply the result by 100 to get the percentage.

Example: If you receive a loan of $ 3,000 and pay $ 500 of interest for 12 months. How much was your annual interest?

  1. Divide $ 500 for $ 3,000 which gives 0.166
  2. Multiply 0.166 by 365 which gives 60.833
  3. Divide 60,833 by 365 (since the loan is for one year) which gives 0.166
  4. Multiply that by 100 which gives 16.67% which would be your annual interest or APR.

What defines your annual interest or APR?

What defines your annual interest or APR?

The annual interest or APR is defined according to your credit record. The better credit record you have, you will receive lower interest on personal loans. Your credit record depends on whether you have paid your bills on time and how many other debts you have compared to what you earn monthly (If you do not know your credit score or have not reviewed it in some time reviewed here for free).