What Is a Personal Loan :
A personal loan is a type of installment account. It’s a fixed amount of money you borrow one time from a lender. When your loan application is approved, the lender issues your full loan amount in a single lump sum. Personal loans generally feature fixed interest rates as well. Plus, you repay the loan in set monthly payments over a fixed number of months. Personal loans have many benefits compared to other classes of borrowing, such as typically offering lower interest rates than credit cards.
Understanding Personal Loans :
Personal loans are typically unsecured. With unsecured debts, you do not have to put up collateral, like your home or car, to back the loan. This means less potential risk for you, but more for the lender. Instead of considering the value of your collateral, a lender approves or denies your personal loan application based on the strength of your credit profile and other factors, like your income. Because lenders take on more risk with unsecured personal loans, you will generally be charged higher interest rates than you would for secured loans, like mortgages. Unsecured personal loans aren’t entirely without risk, and you’ll still need to keep an eye out for potential hazards like early-payoff penalties and large upfront origination fees.
Reasons to Get a Personal Loan :
Deciding whether or not to apply for a personal loan is unsurprisingly a very personal decision. It’s a decision you shouldn’t make without considering the costs, risks, and how the loan may impact your life. Here are some reasons a personal loan might be a good idea.
1)A personal loan might save you money if you qualify for a low APR and use the funds to pay off high-rate debts.
2|)You need to pay a tax obligation, and a personal loan is a more affordable option than setting up payments with the IRS or your state.
3)A major, unexpected expense arises, and you don’t have the savings to cover the cost.
Personal loan interest rates :
Personal loan interest rates can range from around 4% to 36%, based on your credit. Other factors, like debt-to-income ratio and the length of your loan, may also come into play. Lenders who issue personal loans rely on credit scores to predict the risk of doing business with you. FICO Scores, for example, predict the likelihood that you’ll pay any of your credit obligations 90 days or more late within the next 24 months. A good credit score tells lenders you’re a less risky borrower. This may improve your chances of loan approval and perhaps help you secure a lower interest rate and better terms. Additionally, paying off a personal loan in full should improve your overall credit score. According to the Federal Reserve, the average interest rate paid on a 24-month personal loan is 9.63% at the time of this writing.
Personal Loans vs. Credit Cards
Comparison of Personal Loans and Credit Cards :
1)Check your credit reports and scores :You should review all three reports from Equifax, TransUnion, and Experian. Dispute any errors you find with the credit reporting agencies. Once you know the condition of your credit, you’ll have a better idea which lenders are more likely to approve your loan application.
2)Shop for the best deal: Take your time to review rates, fees, and terms from several lenders before you apply for your preferred personal loan. It’s fine to see if you’re pre-approved by multiple lenders that only require a soft inquiry initially. However, it’s best to reserve hard credit inquiries for when you’re relatively sure you’ve found the lender you want to use.
3)Submit your application :Once you’ve chosen the personal loan offer you believe works best for you, it’s time to apply. Submitting an official application will generally result in a hard credit inquiry. Depending on the lender, you may also need to provide additional documentation, like a copy of your driver’s license or ID and verification of income and employment.
The Bottom Line
If you use a personal loan the right way, it may help you to pay off other high-interest debts or cover essential, unplanned expenses. Make sure to carefully assess your ability to pay back the loan because taking on debt is a serious decision and should not be taken lightly.
Methodology
Investo pedia is dedicated to providing consumers with unbiased, comprehensive reviews of personal loan lenders for all borrowing needs. We collected over twenty five data points across more than fifty lenders including interest rates, fees, loan amounts and repayment terms to ensure that our content helps users make the right borrowing decision for their needs.
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