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Financial organizations produce a variety of loaning types to fulfill the needs of various clients. Each category is designed to cover the costs associated with a given circumstance.
So, how does a personal loan work, how to apply for a personal loan, and its interest rates? These are all answered in this article. However, before doing so, the article clarifies what a personal loan is and the reasons to get a personal loan.
What is a Personal Loan?
Personal loans are the option that debtors refer to when in need of immediate and large cash. The intention from this loan is other than house or vehicle purchases. Commonly, this loan should not exceed $100,000. Even major creditors will not allow the total amount to reach the said number. Therefore, banks, credit unions, and independent online lenders often offer personal loans ranging between $1000-$50.000. One of the reasons for limiting the amount is that this loan type does not have collateral and falls under the unsecured category. Moreover, the debtor is free to cover any expense using the borrowed amount. In other words, the borrower does not have to purchase a liquifiable object that helps the lender secure the repayment.
What is the Point From a Personal Loan?
Debt consolidation, emergency expenses, moving home, business startup, wedding finances, and a big purchase are things for the personal loan to resolve. One would wonder why a personal loan and not a payday loan or home equity loan in these cases? What are the reasons to get a personal loan?
In fact, a quick review of the personal loan terms and conditions makes us understand that they make more sense in specific situations. One of these situations is when the debtor would like to repay the borrowed amount over a relatively long period of time (1-7 years) in monthly installments, with fixed interest rates. So, it all depends on the borrower’s circumstances and their objective from borrowing the amount. If the debtor
- is in immense need to cover a medical bill or big purchase
- is unable to repay in a short period of time, as in the case of payday loans
- in need of relatively a large amount with better interest rate rather than applying for credit
- in need of consolidating debts of high interest
- has no collateral to secure the debt with. Instead, he has a good credit history or a cosigner (that could be a family member or close friend)
- has a house but did not reach the supportive level to apply for home equity loan
- has as saving account or certificate of deposit
the personal loan is an excellent choice. Personal loan for business use is also a valid option. Paying in fixed installments over a relatively long period will allow the business owner to grow the business while paying its principal amount.
However, the personal loan is not the best match for covering educational expenses, vehicles, or home purchases. We need to remember that lenders create a variety of loan types targeting specific clients. These come with specific benefits for the business. For instance, a car loan may include car service discounts. The personal loan does not include such a benefit. The purchase of a gadget from the shop with specific terms (guarantee, additional appliance, etc.) might be more affordable than with a personal loan. Therefore, borrowers study and compare available options before decision-making.
Are There Various Types of Personal Loans?
Personal loans can differ in their name, but generally, they have the same criteria. There are personal loans for business, others for debt consolidation, business use, vacation, etc.
Personal Loans: How Do They Operate?
Once you are approved for a personal loan, the funds will be deposited into your bank account within 24 hours. Starting from that moment, you will be responsible for the repayment. The repayment process is carried out in installments over a fixed period. The loan term is unique to each lender and is marked in the loan agreement. However, it is typically between 1-7 years. A borrower is expected to pay off the loan monthly, with a fixed interest rate added on top of the principal amount.
What About Personal Loan Interest Rates?
Interest rates associated with personal loans may look more convenient than with other loan types. Interest rates are unchangeable and determined in the loan agreement, so no surprises are expected while paying back the loan. A personal loan usually costs less than a credit card. However, many factors influence the rate. The most important factor is the credit score. The higher the score, the lower the interest rate. For instance, those who have an excellent score will get a personal loan of 9.30%. Those with a fair credit score will get a personal loan that has 22.16%. Those with a bad credit score may not qualify for a personal loan at all. Methods on how to improve credit score before applying should be identified.
The interest rate of personal loans is not always lower than what is offered with other loan types. For example, obtaining a home equity loan could imply a lower interest rate. However, you are risking the ownership of the house. You are paying the personal loan in a longer period than payday loans. This means you are not necessarily repaying the debt with a better rate.
When selecting a personal loan, a borrower should consider a loan’s APR rather than the interest rate alone. This is the best way for landing on the best possible option. In fact, the APR includes both the interest rates and other fees associated with loan. These may include discounts, broker fees, and rebates. Personal loan lenders offer APRs ranging from 6% to 36%, making careful comparison a must before applying.
Is the Personal Loan Good Idea? Precautions
The first thing you should do is to establish a clear aim for the money you borrow. This may seem simple enough, but the sheer variety of loans often proves to be overwhelming. Ranging from car payments to credit card debt, loan types are designed with specific purposes in mind. The wrong loan may cost you far more than you initially borrowed. If you have no financial literacy, the personal loan adds to your trouble. For example, you want to use a personal loan to consolidate your debt but never stop misusing your funds you are overspending. In this case, the personal loan will be an added debt. Moreover, you cannot use the credit card further the way you were used to.
Personal loans can help finance wedding with poor credit. However, it might be a challenge to start a marriage life with a big debt load. So, think wisely before making any debt decision.
How to Apply for Personal Loans?
Once a decision is made and you wish to take out a personal loan, the process will usually include the following steps:
- Borrowers provide potential lenders with information such as the purpose and amount of the loan as well as their personal details.
- Lenders review the initial qualifications and deem borrowers’ eligibility. The lower the debt to income ratio (DTI) the higher chances for loan approval.
- Borrowers submit the formal application including the social security number, photo ID, driving license, proof of employment and address, cosigner, supportive documents (saving account details, credit record)
- Lenders revert with approval/rejection within a matter of two days.
It is not necessary for debtors to apply in person. Applying for a personal loan online could be an easier and more convenient process.
It is a must for borrowers to be pre-determined. They need to be clear about the objective behind the loan. They need to search the market, both online and offline, to find the ideal organization which helps them attain their need. Personal loans are not a pleasure to enjoy without paying back. Therefore, make sure you refer to it only after a good survey.