Personal loans can be helpful if you’re looking to pay for major expenditures or unforeseen costs, such as auto repairs, house remodeling, or emergency medical bills.
You might be thinking “What is a personal loan?” it’s a lump sum amount that allows you to repay the loan amount in installments and provides you with the necessary finances right away.
Typically how it works is that the loan must be repaid over a predetermined length of time with an agreed-upon rate of interest. Depending on the lender, the payback time may be as little as a year or as long as ten years.
However, there’s more to know about getting a personal loan, let’s explore what you need to be aware of.
What is a Personal Loan?: Defining the Terminology
If you’re thinking about what is a personal loan, you can say that it’s a type of unsecured loan ( which doesn’t require any asset as collateral). You can borrow money for several uses with a personal loan. For example, a personal loan might be used to fund your dream high-ticket course, pay for home improvements, or consolidate debt.
The catch is that: you have to repay the money you borrow over time, usually with interest. In certain situations, defaulting on an unsecured personal loan increases borrowing costs because it will negatively impact your credit score. The worst scenario is for your lender to sue you to withhold your salary, which would allow them to take money right out of your paycheck.
So, how do personal loans differ from conventional loans? Well, a personal loan, sometimes referred to as a consumer loan, is a multipurpose loan that you can use to finance any urgent demands you may have. There’s no specific need to define what the loan is for, you can just get the loan based on the personal loan terms.
Purpose of a Personal Loan: What Can It Be Used for?
If financing a significant purchase is your goal but you don’t want to be restricted in how you use the money, an unsecured personal loan may be a viable option. Before applying, find out from your lender which uses are accepted for the loan.
There can be multiple reasons why someone might apply for personal loan, since it can be used to fund anything. Some of these include: financing the costs of education, buying a car, investing in high-ticket coaching and training, launching a small business, and funding significant life events like weddings and holidays.
Types of Personal Loans: Secured Vs Unsecured
As mentioned before, there are two types of personal loans: secured and unsecured so how are they different from each other?
Secured Personal Loan
For a secured personal loan, you’ll need to have collateral (which is an asset of value) that the lender has the right to confiscate if you don’t follow the terms of the loan arrangement. Since there is less risk for the lender, these loans typically have lower interest rates.
Unsecured Personal Loan
On the other hand, unsecured loans are only secured by the guarantee to pay back the loan. Therefore, while determining whether you’re a good candidate, lenders just consider your creditworthiness, income level, and total quantity of outstanding debt. The personal loan interest rates are usually higher on unsecured loans because the lender is taking on greater risk.
Personal Loans Examples to Consider
With both of these types of personal loan, it’s possible to achieve more financial objectives than you think such as:
- Debt consolidation loans: For borrowers who have accumulated a mountain of high-interest credit card debt or debt from previous loans, debt consolidation loans are the most popular kind of personal loan. When consolidating debt, personal loan rates are less expensive which means you can save interest worth thousands of dollars.
- Home improvement loans: If you know how much your project will cost in total and you don’t have enough equity in your house, home renovation loans can be the best option.
With a personal loan for home improvement, you may get the money you need to finish repairs and upgrades on your house without having to use it as collateral.
- Medical loans: You can take out a medical loan specifically to pay for medical care such as emergency operations, IVF treatments, and elective surgery. Since the majority of medical loans are unsecured, you are not required to use your house or any other asset as security for the sake of your health. Nonetheless, you’ll need good credit to receive low interest personal loans.
- Consumer loans for high-ticket coaching & training: These personal loans are offered to people looking for money to pay for pricey coaching programs by lending institutions or specialized financing organizations. Usually, the purpose of these loans is to pay for expensive personal development courses, seminars, workshops, or coaching sessions such as cybersecurity Training/Coding Bootcamp, real estate coaching, or Airbnb coaching.
- Tax Resolution Company fee loans: Tax resolution financing is a quick and simple option to help clients get their taxes straightened out when they feel that their tax obligation is unmanageable. In addition, tax companies receive payment up front and in a matter of days when their clients’ loan applications are approved.
Regardless of what you need the loan for, remember that you’ll need to comply with the personal loan eligibility requirements.
Where Can You Get Personal Loans? : Eligibility and Requirements
There are a few options if you’re looking to apply for a personal loan: banks, credit unions, online lenders, and peer-to-peer lending platforms are frequently used.
- Banks: Banks provide flexible repayment terms and affordable interest rates, making them an excellent option especially if you need an emergency personal loan. However, they have more strict rules such as having a strong credit history and score. Before you can receive a loan, you might need to register an account with a bank because some banks only lend to existing clients who have deposit accounts.
- Credit unions: For small personal loans, credit unions can be an excellent option if you only need to borrow a small sum. Due to their nonprofit status and member ownership, they have some of the lowest interest rates available.
However, like banks, the majority of credit unions need you to become a member, which may require you to reside in a specific area or have military links.
- Online lenders: Unlike many banks and credit unions, there is no need to physically visit a branch. The standards for online personal loans from this kind of lender are frequently less strict. For example, compared to banks or credit unions, it might be simpler to obtain personal loans for bad credit from an online lender.
- Peer-to-peer lending platforms: Peer-to-peer lending is a type of direct lending where funds are given to people or companies without the involvement of a formal financial institution. Online platforms that connect lenders and possible borrowers typically offer unsecured personal loan, which make up the majority of loans. Moreover, these institutions offer to help clients with various credit levels, ranging from bad to excellent.
You’ll realise that not all lenders might be suitable for you so you can narrow down the number of possible lenders by taking into account your credit score and financial demands.
So, let’s look at what you should consider before choosing a lender to finance a personal loan:
- Interest rates: Interest rates between lenders might differ significantly. Given that it determines the majority of your loan’s total cost over time, this is likely the most crucial factor to focus on. Along with the interest rate on the loan, you should also carefully consider origination fees when examining annual percentage rates, or APRs.
- Charges or fees: Choose a repayment period and the amount that you’re comfortable with paying. Longer terms can result in greater overall interest expenses even if they may have lower monthly payments. To meet your financial objectives, balance the loan amount and term.
- Repayment terms: Your chosen lender may impose origination fees, late payment fees, and prepayment penalties. This can impact the entire cost of your loan so it’s important to go over the fine print and comprehend each lender’s conditions.
Finally, when you’re happy with your personal loan terms, you can go ahead and apply for it.
Pros of Personal Loans: How Can They Benefit You
Regardless of the use or type of your personal loan, there are some general benefits they can offer, such as:
Quick Access to Funds
In an emergency or other case where you need money immediately, personal loans might be helpful because they typically have short approval and payment deadlines. The money from your loan may be deposited into your bank account as early as the following working day, according to certain lenders.
So, making a big purchase, consolidating debt, or using the loan in another way may be simpler as the payments are made all at once.
Easier Application Process
Most individuals don’t need to think about their personal loan eligibility when they apply online for personal loans. Unlike other loan terms and conditions, these loans are easy to get and don’t require much time for verification.
Low & Fixed Interest Rates
When comparing credit card APRs to personal loan APRs, your credit score and income level might be key factors in making sure you have a low interest rate. For customers with stellar credit histories, you can apply for a loan amount larger than the credit card limit you have.
What’s important to remember is that once you choose a loan with a specific interest rate, the total loan amount doesn’t change. You can also use a personal loan calculator to determine how much you owe.
Cons of Personal Loans: What Should You Keep in Mind
With any personal loan, there are disadvantages along with its advantages. Let’s take a look at what they might be:
Missed Payments Can Impact Credit Score
While paying on time helps improve your credit, missing payments might lower it. Even one missed payment can drastically lower your credit score, as most lenders record payments that are more than 30 days late to the credit bureaus.
Increases Debts
Adding a personal loan to the mix, along with your other loans will increase your debt-to-income ratio, which may make it more challenging for you to be approved for further credit, such as a mortgage or auto loan. Even if you think you can use it for your home, it’s not a smart idea to get a personal loan with down payment, and most lenders won’t let you do so.
How Personal Loans Work: A Step-by-Step Guide
Despite the personal loan advantages and disadvantages, it can still prove to be a good option for most individuals. So, if you’re thinking of applying for a personal loan, here are the steps you have to follow:
- It’s a good idea to pre-qualify before looking for a personal loan. You can also check your possible loan amount, rate, payback duration, and monthly payment amount through this short process. You can compare offers from several lenders without affecting your credit score because it requires a simple credit check.
- Examine your loan terms and the costs charged by each lender after you’ve been prequalified. Usually, the APR will include both the interest rate and the fees. After you have selected a lender with whom you’re happy with, you can proceed.
- Afterward, you need to get all the paperwork ready for your personal loan application. You’ll need documents such as address verification, identification verification, income verification, and job information. Make sure that all records are accurate, current, and filed without delay before applying with the accompanying paperwork.
- Once your application is accepted, your money should arrive soon after; in certain cases, that same or the following working day. After you get the money, you can use it to pay your bills or other expenses.
You can plan how you will use the money and how you will pay it back (with interest) before you take out a personal loan. Consider the advantages and disadvantages of getting a personal loan versus choosing another kind of funding.
That being said, you ought to obtain a personal loan only in cases of dire emergency and only when you are certain that you will be able to repay the loan, along with any associated fees and interest, within an acceptable time frame.
FAQs
Q. Who can get personal loans?
Ans: Anyone can apply and get a personal loan, however, you’ve to meet the eligibility criteria from the lenders you’re borrowing from. This can be based on your income, credit score, debt-to-income ratio, and more.
Q. Which personal loan is easiest to get?
Ans: The easiest types of personal loans you can get without a credit check are payday loans, auto title loans, and pawnshop loans. However, these usually have high fees and interest rates that can harm your finances.
Q. How is personal loan interest calculated?
Ans: The annual interest rate divided by the number of months in the loan can be used to determine the monthly interest payment. Add the loan balance to that amount after that.
Q. Can personal loans increase credit score?
Ans: Your credit score may temporarily drop as a result of a personal loan, but it will eventually increase with timely payments, contributing to the improvement of your credit. However, failure to make loan payments on time will lower your credit score. Bear in mind: that taking out a personal loan can make it harder for you to obtain credit on other lines.
