A personal loan is a sum of money that you can borrow for a variety of purposes. For example, you may utilize a personal loan to consolidate debt, pay for home improvements, or arrange your dream wedding. Banks, credit unions, and online lenders can all provide personal loans. Borrowed funds must be repaid over time, generally with interest. Personal loans may also be subject to fees from some lenders.
- Personal loans are loans that can be used to cover a variety of personal costs.
- All of them offer personal loans to banks, credit unions, and Internet lenders.
- Personal loans can be secured, which means you need collateral to borrow money, or unsecured, which means there is no collateral required.
- Personal loans vary widely in terms of interest rates, fees, loan amounts, and payback terms.
Understanding a Personal Loan
- Moving expenses
- Debt consolidation
- Medical bills
- Wedding expenses
- Home renovations or repairs
- Funeral costs
- Vacation costs
- Unexpected expenses
These loans are distinct from other installment loans that are used to cover specific needs, such as student loans, car loans, and mortgage loans (i.e. education, vehicle purchase, and home purchase).
Tip: Some personal loan providers limit the ways you can use a personal loan. For example, you may be unable to obtain a personal loan to cover college tuition, fees, or other costs.
A personal loan is not the same as a personal line of credit. Lastly, it does not work as a single payment, but rather as a credit card. You have a credit line that you can use to make purchases, but when you do so, your available credit decreases. Then, by making a payment on your credit line, you can free up available credit.
A personal loan usually has a predetermined end date by which it must be paid off. A personal line of credit, on the other hand, maybe open and available to you eternally as long as your account with your lender is in good standing.
Types of Personal Loans
Personal loans can be both secured and unsecured. A secured personal loan necessitates the use of some form of security as a condition of borrowing. For example, you may get a personal loan using monetary assets like a savings account or CD, or with a physical asset like your car or boat. If you fail to repay the loan, the lender may seize your collateral to cover the obligation.
There is no need for collateral when taking for an unsecured personal loan. Banks, credit unions, and internet lenders can offer both secured and unsecured personal loans to qualified candidates. Because there is no collateral to collect, banks often perceive the latter to be riskier than the former. This could result in a higher interest rate on a personal loan.
How a Personal Loan Works
To obtain a personal loan, you must first apply to a lender. This could be a bank, credit union, or online personal loan lender.
In most situations, you’d begin by applying. It is reviewed by the lender, who determines whether to approve or deny it. If you are authorized, you will be provided loan terms that you can accept or refuse. If you accept them, the next step is to complete your loan paperwork.
When that is completed, the lender will fund the loan, which means they will give you the proceeds. These may arrive as a direct deposit into your bank account or as a cheque, depending on the lender. After the loan is approved, you are free to use the cash in any way you see appropriate. You must subsequently begin repaying the loan by the terms outlined in the loan agreement.
Warning: Defaulting on a personal loan can have a serious impact on your credit score. With a secured loan, you could also lose your collateral or be sued by your lender to collect the amount.
Example of a Personal Loan
When considering a personal loan, it’s useful to know how much it might cost. A personal loan’s annual percentage rate (APR) represents the annualized cost of repaying the loan based on the interest rate and fees. The APR and loan length can influence how much interest you pay in total during the life of the loan.
Assume you obtain a $10,000 personal loan with a 7.5 percent APR. The loan has a 24-month repayment period. Under those conditions, you would pay $450 a month, and the whole interest paid over the lifetime of the loan would be $799.90.
Assume you borrow the same amount but under different terms. Instead of a two-year repayment period, you have three years to repay the loan, and your interest rate is 6% rather than 7.5 percent. Your monthly payment would be $304 under these conditions, but your total interest paid would be $951.90.
If you want to get the lowest monthly payment or pay the least amount of interest on a personal loan, you must compare the statistics in this manner. A simple online personal loan calculator can assist you in determining what type of payment amount and interest rate is appropriate for your budget.
Important: Though some lenders do not impose fees for personal loans, others may charge a credit check fee, a loan origination fee, or a prepayment penalty if you pay off the loan early. Paying late may result in a late payment fee.
Where to Find Personal Loans
Your present bank or credit union may be the first place to explore for personal loans. Your banker can advise you on the various sorts of personal loans that are available, as well as the borrowing alternatives for which you are most likely to qualify.
Personal loans are also available online. A number of lenders have online personal loans available. You can apply online, get a decision in minutes, and have financing in as little as 24 to 48 hours after loan approval.
Pay great attention to the specifics when comparing personal loans, whether online or in person. Consider the following in particular:
- Interest rate
- Repayment terms
- Borrowing limits (minimum and maximum)
- Collateral requirements
Tips: AnnualCreditReport.com provides a free credit report check. When doing so, keep an eye out for any errors that may be lowering your score, and don’t be afraid to contest them.
It is also a good idea to examine the minimal personal loan criteria. When it comes to the credit score, income, and debt-to-income ratio that are acceptable to get authorized for a personal loan, lenders may have varying requirements. This can assist you in narrowing down the loans that may be the greatest fit for your credit and financial profile.