Whether you find yourself needing money to cover an emergency expense, to pay off large credit card debt, or to make home improvements, a personal loan may be a good choice to improve your financial situation. Personal loans, like any financing, will affect your credit and will cost you money so getting educated on your options is a good idea. Let’s get started in understanding personal loans.
What are personal loans?
Personal loans can be small or large loans, ranging from a few hundred dollars to thousands of dollars. They are usually provided in a lump sum, typically an unsecured loan at a fixed interest rate for a fixed time period, usually 1-7 years. Personal loan requirements vary by lender but consider things like debt-to-income ratio and credit score.
What are the types of personal loans?
Most personal loans are unsecure meaning the loan is not backed up by any collateral. Because of this, lenders charge a higher interest rate. Sometimes called “installment loans”, unsecured personal loans have a benefit of regular set payments each month. Lenders base these loans on your income and credit score. Sometimes it may be difficult to get approved for these loans if your credit is less-than-perfect.
Backed by an asset, a secured personal loan has some sort of collateral such as a CD or a savings account. This loan will allow you to access money without paying fees or putting an asset at risk. A secured personal loan will have fees and an interest rate. But, because of the collateral, this loan type may have a lower interest rate. Please consider the risk in a secured personal loan should you not be able to pay back the loan.
What do I expect for the interest rate on a personal loan?
Most personal loans offer a fixed interest loan, which means the interest rate and the monthly payment will be consistent month-to-month. While this may make the interest rate slightly higher than a variable interest loan, it will make your payments predictable.
A variable Interest loan makes your interest rate vary over time depending on the market. Some banks offer a line of credit which usually offers a variable interest rate. You can borrow only what you need. But recognize that the rates are affected by the market and there could be fees.
Either way interest rates vary lender to lender. And your credit score will affect the interest rate offered to you as well. Shop around for the best rate.
How do I qualify for a personal loan?
Requirements on loans vary lender to lender. It is smart to go over your own finances as a first step to evaluate your income and your assets as well as your debt. Knowing your credit score is wise as well so get your free copy online before applying. Most lenders have a requirement on debt-to-income as well as a credit score minimum. Some lenders allow cosigners, so if your credit is not up-to-par, this may be an option. Read up on lender requirements prior to applying.
What are the fees associated with a personal loan?
Fees can also vary lender to lender. Pay attention to fees as they also determine the affordability of the loan. Origination, application, late payment fees, and even pre-payment penalty fees are examples of extra money some lenders charge. You can expect an origination fee of about 2% on most personal loans.
Where can I get a personal loan?
While banks come to mind for loans, consider other options such as credit unions, online lenders, and peer-to-peer lenders. Make sure you check the Better Business Bureau and the Consumer Financial Protection Bureau and read reviews on lenders as you are shopping for your loan.
Are all personal loans the same?
No. Not all loan products are the same. Understanding the basics of a personal loan and shopping around for a great lender is worth the investment for your financial future.
We hope you have a better understanding of personal loans and you’ll be able to get the most out of the loan you choose.