If you need to borrow money, you have several options. For example, you can consider a non-bank loan, which is relatively easy to get for smaller amounts of money, but only if you are sure that you can pay back the amount you owe in a very short time.

On the other hand, you may prefer a personal loan, which, despite a more complicated application and approval process, will give you more money, cost less and offer a much longer repayment period.

With some differences, non-bank loans and loans for individuals have essential features common to all types of loans: money is borrowed for a certain period of time, at a certain interest rate, and must be returned by a certain date.

In addition, in both situations, borrowed money can be used for different reasons. Although non-banking financial institutions (NBFIs) are not interested in knowing the purpose for which you are requesting money, almost any commercial bank that offers personal loans will ask you what you intend to do with the requested amount.

However, these two types of loans differ, sometimes significantly, in terms of the impact they can have on the borrower. The main differences are the approval process, the cost of the loan, the length of the repayment period and the risk of accumulating additional debt.

Read on to find out which loan best suits your needs.

Important aspects regarding non-bank loans

• In case of unexpected financial situations, a non-bank loan with instant approval can quickly provide you with the funds you need.
• Non-bank loans can have very high interest rates and hidden fees.
• Personal loans from banks involve a more complicated approval process, but have lower interest rates and longer repayment terms.
• Because of the late fees that are added to the amount owed, non-bank loans can be risky for people who, for whatever reason, cannot repay them on time.
• Typically, non-bank financial institutions do not use the FICO score from the Credit Bureau, which means they can also provide loans to people with bad credit.

Other characteristics of non-bank loans

They are easy to get

Non-bank loans involve relatively small amounts of money — for example, 1,000 lei, and in some cases up to 10,000 lei. In addition, despite the fact that TINs require applicants to provide proof of income, in most cases collateral is not required to obtain a loan. In addition, IFNs generally do not take specific steps to determine whether an individual can repay the loan.

They usually only ask for permission to debit the debtor’s bank account so that they can automatically withdraw the amount owed on the day it is due.

They have a short shelf life

Non-bank loans are designed for quick repayment. This usually means within a few weeks or until the person receives their next paycheck (or pension).

Because of the short repayment period, it is very easy for borrowers to fall into a debt cycle and face significant financial problems if they do not repay the money according to the contract. When this happens, credit institutions will charge late payment penalties, making it even more difficult to repay the debt.

They are expensive in terms of Annual Effective Percentage Rates (APR)

Non-bank lenders usually charge exorbitant interest rates. This indicator can average 300% and even reach 4000%.

Because of these interest rates, as well as the penalties that lenders charge in case of late payment, some consider non-bank loans to be extremely risky.

What is a personal loan?

First of all, to get a loan for personal needs, you need to visit a financial institution that provides such loans (at a bank) and fill out a loan application.

Whether the bank will grant you a loan or not depends largely on your application and whether you accept the terms of the loan agreement. Typically, these terms will include the loan amount, interest rate charged, repayment dates and total period, interest charged as late penalties, etc.

A guarantee may be required for bank loans

Personal loans can be secured or unsecured. Secured loans require some form of collateral, such as a car or house, assets that the lender can seize if you can’t repay the amount owed.

In addition, depending on a number of factors (the size of the requested amount, the degree of risk and the level of income), the bank may ask you to bring one or more guarantors.

On the other hand, unsecured loans do not require collateral. However, people who choose this option must prove good credit, stable income and a job with an open-ended contract.

The loan can be repaid in monthly payments

Generally, personal loans are repaid over a long period of time, which can vary from a few months to a few years. Thus, the borrower will have to make several monthly payments until the entire loan amount, plus interest and any fees, is paid off in full.

They have a lower cost compared to non-bank loans

Compared to non-bank loans, personal loans have much lower interest rates, ranging from 6% to 15% on average. In addition, they have lower fees, lower late fees and longer repayment periods. Non-bank loans vs. personal loans: which choice is right for you?

Before deciding which of the two options is best for you, think carefully about your actual financial needs and ability to repay the borrowed amount.

If you need a small amount of money that can be paid back quickly, a non-bank loan may be the right choice. However, if you are interested in a larger amount of money or need more time to repay the loan, then a personal loan will probably be more beneficial for you.