A personal loan is an installment credit loan that is flexible, has short to moderate repayment facilities, and is easy to fund. What is a personal loan? Personal loans, debt consolidation loans, unsecured loans, or signature loans are one-time cash payments given to borrowers. Borrowers pay the amount back with interest in monthly installments until the loan period ends.
The repayment process and terms range between 1 and 7 years. When you apply for a personal loan, you will receive all the funds at once and can use them for the purpose for which you took the loan. If you plan on taking a personal loan, whether to clear debts, start a business, clear expensive medical or other bills, or fulfill your goals, here is all you need to know about personal loans.
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What is a Personal Loan?
A personal loan is taken by a borrower in a lump sum with a fixed payment. It is sometimes taken to consolidate debt, make personal investments, or cover emergency expenses. Every personal loan has unique terms and conditions, depending on interest rates, monthly payments and repayment regulations. Furthermore, the approval of a personal loan varies based on the borrower’s creditworthiness, income, and other factors.
Repayment terms at most personal loan lenders range between one and seven years. Borrowers receive all the funds at once and can use them for nearly any purpose. Taking a personal loan has pros and cons; you need to have a steady income to pay your loan, get loans approved within a week or much longer, pay interest for your loans, and use the loan to achieve your goals.
Loans come with interest and other fees, like origination or administrative, that can be deducted once approved. An average 24-month loan APR is 11.23%, and the APR for credit cards is 19.07%. You can get personal loans from online lenders, credit unions, and banks. After you receive the cash, remember to pay it back every month until the debt is cleared and the loan period ends. Most people opt for personal loans because they have lower fixed interest rates than credit cards. They are also easier to qualify for than home equity or mortgage loans.
How Do Personal Loans Work?
Personal loans work by borrowing money from the bank or financial firm and paying it back in equal installments for a particular period, one to seven years. Unlike car loans, most personal loans are not secured, so you don’t need any surety approval. As these loans aren’t secured, you must qualify initially based on your credit score and debt-to-income ratio. Those who lend money use this ratio to calculate and compare how much you pay for other monthly credits from your income.
First, you must fill out an application and await the loan approval. This process can take from a few hours to many days. Once approved, the lender will give the money to your account. After the amount has been funded, you can start repaying your loans and try paying within 30 days. You can borrow between $1,000-$50,000 or more with an interest of about 6-36%.
You can get loans easily if you have a good credit score; those under 500 are eligible for a bad credit personal loan. Your interest and installments will vary monthly depending on whether you have a fixed or variable-rate loan. Once you’ve paid your loan, the credit line will be closed and you’ll not have access to it.
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Types of Personal Loans
There are two types of personal loans – secured and unsecured personal loans. A secured loan needs a surety as a condition for borrowing funds. For example, you can secure a personal loan with cash possessions like a savings account, a certificate of deposit (CD), or any physical property like a boat or car. If you fail to pay your lender the loan, the lender can keep your surety to fulfill the debt.
On the other hand, an unsecured personal loan doesn’t require a surety to borrow money. Credit unions, banks, and online financial firms offer both secured and unsecured personal loans to qualified borrowers.
Example of a Personal Loan
If you plan on applying for a loan, you must know and understand how much it costs. The annual percentage rate (APR) for a personal loan shows the annual price of repaying the loan. This is usually based on the interest rate and fees. The APR and loan term can amount to how much interest needs to be paid overall for the total loan period.
For instance, you get a $10,000 personal loan with an APR of 7.5% and a loan repayment time of 24 months. With these terms, you need to pay $450 every month and the total interest rate to be paid over the loan period will be $799.90. Use a simple personal loan calculator to help you find out what kind of payment amount and the interest amount are well suited for your budget.
Where to Find Personal Loans
Getting a personal loan from the right financial institution is very important as it will help you take the loan and repay it with reasonable and affordable interest rates. Given below are some firms you can get personal loans:
- With good and excellent credit, you can get personal loans from SoFi.
- Upgrade offers the best personal loans even if your credit is bad.
- If you are looking for personal loans with low interest rates, LightStream is a good option.
- PenFed offers personal loans for Credit Union Financing.
- Happy Money offers the best personal loans to consolidate your credit card debt.
- U.S. Bank offers the best personal loan for Traditional Banking.
- Get the best personal loan for No Credit from Upstart.
- If you have below-average credit, get personal loans from LendingPoint to help you through.
What is a Personal Loan Used For?
You can use a personal loan for anything, but it is best for large one-time purchases, as it places your finances in a better position than when you got it. Some lenders may restrict how you use your money, so check with your lenders before using your loan for your needs. Personal loans can be used for the following reasons:
Debt Consolidation
Consolidate your credit cards and other high-interest debts into one single monthly payment by using a personal loan. Concerning debt consolidation loans, it is good only if the loan rates are less than the rate on your current debts. This means you will save money and pay off your debts sooner.
Home Improvement Projects
Taking a personal loan is a good option if you have a home improvement project. You can use the money to upgrade the kitchen, bathroom, or bedroom walls. Home improvement projects increase the value of your home, making up for the interest rate you pay. Before borrowing, compare prices and look for good options.
Emergencies
Personal loans can help cover emergencies, like big medical bills or car repairs. Check out better affordable options first, as sometimes, you can pay high interest rates. You can contact a local financial assistance program, borrow from a friend or family member, or look for side hustles to earn a little extra.
Discretionary Spending
A personal loan can be used for discretionary expenses like going on a vacation or having a wedding. However, these loans can have high rates and long repayment terms. Financial experts suggest not using or taking personal loans for such expenses.
What Is the Difference Between a Cash Advance Loan and a Personal Loan?
Both cash advances and personal loans are ways to borrow money. A cash advance loan is a short-term, high-interest loan that usually covers emergency expenses. On the other hand, a personal loan has low rates and can be paid back over a longer period.
When is a Personal Loan a Good Idea?
A personal loan is a good idea in the following situations:
It’s your lowest rate option: The most affordable fund is the one that is financed with less APR. Take time to compare personal loans with other options to borrow and find which one suits you.
You can afford the monthly payments: If you miss your payments, you can be charged a late fee, which will lower your credit score. With the help of a personal calculator, you can check the rate and repayment terms needed to get a personal loan and make monthly payments that fit your budget.
You don’t want to provide collateral/surety: Most of the loans are unsecured and don’t require a surety to be given. Therefore, the lender can only take your property if you make payments or even miss them.
Faster funds: If you’re looking for fast financing options, consider a personal loan. Many financial firms and lenders take a week to approve loans, but some can do it within a day or two.
How to Qualify For a Personal Loan
If you are going to apply for a personal loan, you need certain credentials to qualify. Here are some of them:
Credit
A strong credit score will help you get a personal loan with a lower interest rate. A good credit score of 690 and above and a credit history with payments made on time towards other loans and credit cards will help you qualify for the best rates.
Income
A steady and good income will help lenders determine if a loan can be given. They check if you have all the means to pay back the money borrowed. With a high income, you can get a personal loan at a low rate. Multiple types of income, including employment, can be given on the application. Most often, financial firms look at freelance earnings, alimony, child support, or Social Security as acceptable sources of income.
Existing debt
Before you take or apply for a personal loan, make sure you have cleared your previous debts. Lenders usually check if your income needs to be spent on repaying other debts. A high DTI will make it difficult to make payments. If your DTI exceeds 36%, pay your debts before applying for a personal loan.
Do Personal Loans Have Fees?
When the loan is processed, the bank will charge some administration-related costs. This money is small and can vary between 0.5% and 0.25%. The fee charged for processing the loan can vary depending on the bank.
Conclusion
Before you apply for a personal loan, know and understand the reason for taking a loan, set a goal and work towards it. Read through the procedures, check banks, financial firms and lenders, know the upsides and downsides of a personal loan, check your bank documents, know your social security number, take time, look around, compare prices and sign up for a good deal. Make sure you maintain a good credit score and pay existing debts to bag the best loan rates. Amid financial support, download the Beem app for the best personal loan rates.