Whether you are consolidating debt or wish to buy your family that dream pool of theirs, applying for a personal loan is suitable since the reasons you have are personal, which is the primary purpose of this kind of loan.
Understanding personal loans
Personal loans can be considered a form of unsecured loan, which means you are not required to provide collateral if ever you cannot repay the loan. Therefore, a creditor has nothing to seize if you take out an unsecured loan and fail to repay it. However, there are still consequences. For instance, your credit score might plunge, and your loan can be the default.
Moreover, a personal loan is a sum of money you can borrow to spend for different purposes. For example, you can use this to consolidate debt, spend it on home renovations, or even plan your dream wedding. These can be offered by banks, online lenders, or credit unions. However, over time, they still need to be repaid. Also, some lenders may charge you fees for your personal loans.
How do they work?
This kind of loan enables you to borrow a lump sum of finances to pay different expenses. You can repay those funds through regular payments or installments over time. For example, you can use personal loans to cover moving expenses, debt, medical expenses, and unexpected situations requiring financing.
On the other hand, these differ from other installment loans like student loans, car loans, and mortgage loans. These loans fund expenses such as education, vehicles, or your house.
When it comes to personal loans, they usually have a fixed end date wherein the loan should be paid off. Meanwhile, a personal line of credit can be open and available indefinitely as long as your account is still in good standing with your lender.
There are two types of personal loans: The Secured Personal Load and The Unsecured Personal Loan
Secured Personal Loan
This one requires some collateral to borrow. For instance, you can have a personal loan using cash assets like a savings account or a certificate of deposit. A physical asset, such as your car or a boat, can also be used. If you ever consider getting your loan into default, the lender can keep your collateral to fulfill the debt.
Unsecured Personal Loan
Here, no collateral is needed when borrowing money. Banks, credit unions, and even online lenders can provide secured and unsecured loans to qualified borrowers. Generally, banks consider the latter more at risk than the former since no collateral is collected. Meaning you could pay a higher interest rate for your personal loan.
When is it a good time to apply for a personal loan?
Owing High Credit Card Debt
Taking out a personal loan to pay off a substantial balance on your credit cards is a good way of saving money. Picture this, the average interest rate on credit cards is up to 23.24%. On the other hand, the average rate on personal loans is 10.71%. This data can enable you to pay the balance quickly while paying less interest. Besides, it is a lot simpler if you pay off a single debt obligation than trying to pay off multiple ones.
Planning a major purchase or home improvement
If you plan on buying new appliances, installing new furniture, or want to make a big purchase, consider taking out a personal loan since it is a less expensive option than financing through the seller or using a credit card. However, if you have a home equity loan, it is also a less expensive option. But because it is a secured debt, you might put your home on the line.
Making your credit score better
Having a personal loan and paying it off on time can help you improve your credit score, especially if you have a lousy record of missed payments plus other debts. Adding a personal loan to your credit report, mainly showing credit card debt, can help you with your credit mix. Having a variety of loans with proof that you can handle them correctly is a good look for your score. With that being said, borrowing an unnecessary amount of money to improve your credit score can backfire. Instead, try paying your other bills before the deadline and maintain a low credit utilization ratio.
How to get a personal loan
First, you need to check your credit since your credit score is vital for applying for a personal loan. Try checking your credit report and attempt to find solutions for any mistake that your find that could hurt your score.
Next, a lot of lenders let you pre-qualify for a personal loan. They preview your potential rate and term. When you do so, there will be a soft credit check to compare loan offers without affecting your credit score. Usually, the best offer has a low annual percentage rate (APR), and its monthly payments suit your budget.
Lastly, during the formal application, there will be documents required to verify your identity and income. By this time, lenders would conduct a hard credit check that could temporarily drop your credit score by a few points. Once approved, you can look forward to the fund in a week; the first payment would usually be due in 30 days. Also, remember to review your monthly budget and plan to pay off the loan.
Below are some advantages and disadvantages of personal loans
- Since you get the loan payment at a single drop, it would make the process more straightforward when you make a significant purchase. Moreover, you will get a fixed interest rate and achievable monthly payment that is easier to handle.
- A personal loan is a good substitute if you wish to finance a big purchase but don’t want to be restricted on how you use the money.
- Unlike short-term loans, personal loans can last 2-10 years, depending on the lender. Plus, you get a reasonable monthly payment with enough time to repay your debts.
- In personal loans, the interest rates are not always the lowest choice. This mainly applies to borrowers with poor credit paying higher interest rates than a secure loan that needs collateral.
- These loans may come with fees and penalties that can increase the cost of borrowing. Other loans come with origination fees of 1% to 6% of the loan amount. Also, the fees that cover loan processing might be rolled into the loan.