Personal Loan Resources – Loan Basics | Santander Bank - Santander
Personal loan basics
Find answers to questions on how personal loans work, including what they can be used for, how interest works, potential fees, and more.
What is a personal loan?
A personal loan is a specific amount of money that can be borrowed with the agreement that it will be paid back with interest over a set period of time, known as the loan term. The borrowed money can be used to consolidate debt, pay for a home remodel or repairs, or to cover surprise expenses and major life events. Personal loans cannot be used to finance post-secondary educational expenses.
What are personal loans used for?
Personal loans can be used to pay for many expected, or unexpected, expenses in your life. Maybe your kitchen needs a makeover, your car requires repairs, or it’s time to replace some old appliances. One of the most popular (and wise) uses of a personal loan is to consolidate higher interest debt at a lower rate to reduce monthly payments. However, while a personal loan can give you financial flexibility for nearly any occasion, they cannot be used to finance post-secondary educational expenses.
Can I use a personal loan to consolidate debt?
Yes. Consolidating debt using a personal loan can be a great way to reduce your monthly payments and save money in the long run. It works like this: If you have high-interest debt, you can consolidate it by taking out a personal loan with a lower interest rate, and use that loan to pay off your higher interest debt. That way, all your debt is consolidated in one place at a lower rate, so you’re paying less interest, resulting in lower monthly payments.
How does interest work on a loan?
Paying interest is the cost of taking out a loan. A fixed interest rate means your rate will stay the same throughout the term of your loan, resulting in predictable payments. You will pay interest as part of your monthly payment.
What is an Annual Percentage Rate (APR)?
Annual Percentage Rate (APR) represents the yearly cost of borrowing money. All lenders are required by law to disclose APR because it gives borrowers a clear picture of how much they will be paying in both interest and fees over the course of a year.
What is the difference between interest rate and APR?
The interest rate is the cost of borrowing money for your personal loan. The Annual Percentage Rate (APR) adds in some of the upfront costs in addition to the interest, including any lender fees.
What is a loan term?
The loan term is the length of time you have to pay back your loan. It’s important to agree upon a term that fits your individual needs—the longer the term of your loan, the lower your monthly payments will be.
How is a personal loan different from credit card debt?
Personal loans have what’s known as a non-revolving credit limit, which means funds are borrowed as a lump sum (usually for a specific purpose) and must be paid back in monthly installments, according to a fixed schedule. A line of credit, on the other hand, follows a different model. It has a revolving credit limit, which means you borrow what you need up to a specified maximum amount (similar to a credit card), and repay only what you borrow plus interest.
How is a personal loan different from a line of credit?
Personal loans have what’s known as a non-revolving credit limit, which means funds are borrowed as a lump sum (usually for a specific purpose) and must be paid back in monthly installments, according to a fixed schedule. A line of credit, on the other hand, follows a different model. It has a revolving credit limit, which means you borrow what you need up to a specified maximum amount (similar to a credit card), and repay only what you borrow plus interest.