Personal Loans: Loan Maturity & Interest Rates

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  • 0:01 What Is a Personal Loan?
  • 1:07 The Application Process
  • 1:38 Types of Personal Loans
  • 2:05 Interest Rates
  • 3:36 Maturity
  • 4:20 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll explore personal loans. You'll learn about the application process and see how credit score can affect the loan amount, interest rate, and repayment period.

What Is a Personal Loan?

Jan is driving home from work when her car starts to sputter, so she slowly guides it to the side of the road. She calls roadside assistance and has her car towed to a mechanic. After the diagnostic, the mechanic tells her the repairs will cost $750. Jan tells the mechanic that she won't have $750 until payday, in three weeks. The mechanic suggests that she apply for a personal loan at Advantage across the street.

Jan walks to Advantage and is greeted by a loan officer. She tells the loan officer about her situation. The loan officer suggests a personal loan, which is a borrowed sum of money used for any purpose. Personal loans have different maturity dates, a specific time for repayment, and interest. Jan asks, 'What's interest?' The loan officer explains that interest is a fee charged by the lender to loan money, which the borrower pays. Jan replies, 'Okay, I'll apply for a personal loan since I have no other options.'

The Application Process

The loan officer gives Jan a loan application to complete. The application asks for Jan's social security number, address, place of employment, salary, how many years she has been employed, and three references. References are people who know an individual and who are used to confirm personal information and serve as a point of contact in case the individual stops making payments and the lender can't find her. Jan needs to give the names, addresses, and phone numbers of her references.

Types of Personal Loans

As Jan completes the application, the loan officer tells her about the two main types of loans: secured and unsecured. A secured loan is backed by collateral, which is something the borrower owns, such as a car, cash in an account, or a home. An unsecured loan is also called a signature loan where the borrower guarantee repayment of the borrowed amount and principal based on her signature.

Interest Rates

Jan finishes the application and the loan officer submits it for review. The officer tells her Advantage will verify the information on the application as well as check her credit score. Credit score is a calculated number based on how well an individual pays her bills. Creditors, or companies an individual owes, send information to credit reporting agencies on how much an individual owes and if she pays on time. The credit reporting agency consolidates this information to create a credit score.

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