What is a personal loan: all you need to know
Curious about what a personal loan is? Wonder if one could be right for you? This guide has everything you need to know about personal loans, including how they work and how to apply!
Can a personal loan help your finances? Find out here
Wondering what a personal loan is? If so, we are here to help you! It is an excellent option for financing anything from a vacation to home repairs.
In this post, we’ll answer your questions about personal loans so that you decide if this borrowing option is right for you! Keep reading to learn more!
What is a personal loan?
A personal loan is a fixed sum of money that you can borrow from credit unions, banks, or online lenders. It can be used for almost any purpose you want and must be paid back over time.
You can use it for a variety of purposes, such as refinancing debt, planning a wedding, home repair, paying for your dream vacations, or even emergencies that may show up.
When you take out a personal loan, the money will be delivered to your bank account in one go. When it comes to repaying, you do it monthly in fixed installments.
Personal loans charge fixed interest rates, varying from lender to lender. Depending on your credit history, the average APR ranges from 9.39% to 17.13%.
Once you get a personal loan, you’ll start repaying within 30 days. The repayment time usually is one to five years, but the terms vary depending on the lender and the amount you’ve requested.
Different types of personal loan
There are many types of personal loans to choose from, but they all have some key characteristics.
An unsecured personal loan, for instance, doesn’t require any collateral for you to qualify. You’ll receive the money in one shot, the pay back your debts over time with fixed monthly payments.
On the other hand, with a secured one, the lender will ask for some form of collateral to ensure they get their money back. But instead of using money as collateral, you can put other things such as your house or car.
Specialized lenders also offer personal loans to their customers to help them afford services and products. This usually comes with convenient terms but may not always provide you with the best interest rates and repayment plan.
Next, we have credit-builder loans. It goes directly into a savings account, which the lenders control. The payments are made through your balance. During the payments, the lender will report it to the credit bureaus to help you increase your credit history.
There are only the main types of personal loans. You might find other categories if you do some additional research.
Benefits and risks of personal loans
Now that you know what a personal loan is and how it works, it’s time to learn its benefits and drawbacks. Let’s go!
- Get the amount all at once, and get more accessible means to make large purchases or pay debts;
- Pay lower interest rates;
- In some types of personal loans, such as the unsecured ones, collateral is not required;
- A personal loan will give spending flexibility since it can be used for a variety of reasons;
- Get extended periods to quit your personal loans payments;
- Get fast-approved and use the money for emergencies.
- With personal loans, you can pay higher fees and penalties;
- You will have to pay interest;
- The installments will be an additional monthly expense;
- If you’re not careful, it can cause you to spend irresponsibly;
- With a personal loan, you make higher payments. If you compare it with credit cards, which charge minimum monthly payments, you might pay more per month.
Does taking a personal loan affect your credit score?
Yes! Like any credit, it will affect your credit score! Whether positively or negatively, it is up to you.
Well, simply applying for a personal loan can make an impact on your credit history. Therefore, some lenders offer a pre-qualification, so you can check if there’s any offer for you without damaging your score.
Also, with on-time payments, you can establish good credit rates. But simultaneously, if you make late payments, you can damage it. So be careful.
What to consider before applying for a personal loan?
A personal loan can be a great way to get the money you need, but there are many details that you should never miss. Therefore, before applying, take a closer look at its terms.
Consider comparing interest rates, fees, and repayment terms first. Collateral requirements and minimum and maximum borrowing limits are also necessary.
In addition, you need to check out the qualification requirements related to your income and credit history. With these easy-to-use filters, you can find a personal loan that is perfect for your needs.
How to apply for a personal loan?
Applying is easy. You first need to pre-qualify for multiple lenders, so you can compare offers without damaging your credit score.
Next, once you’ve decided which offer suits you best, it is time for you to apply. Collect every document needed, such as ID, address, and employment status proof. As well as your Social Security number, education history, and financial information.
You can complete your application online, and once approved, you can access your funds on the same day.
That’s it! By following our tips, you’ll be well on your way to securing the funds you need. And remember, always shop around for the best interest rates and terms before settling on a lender.
Now that you know everything about personal loans, what about learning more about credit scores and how they can affect your financial life? Read the post below and find out what a credit score is!
About the author / Beatriz Vieira
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