- Personal Loans Can be Used For Nearly Any Purpose
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Various types of loans exist for specific purposes. You take out a mortgage to buy a house, an auto loan to purchase a car, or a student loan to pay for college. Yet, you can use a personal loan to cover almost any need.
Whether you strive to consolidate debt, start a business, or deal with an emergency, a personal loan can help you manage a cash shortage. Even better, it allows flexible use, entails short-to moderate-term lengths and quick funding. Later on, you repay such cash infusions in monthly payments over a predetermined period. Depending on the loan amount, you can have several years to repay the loan.
Still, getting approved for a substantial unsecured loan requires a lot of effort and financial stability. Also, it can get more expensive than other types of debt, and it may not be ideal for every situation.
Here’s what to consider before you apply.
What Is A Personal Loan?
Personal loans are like installment loans and involve a fixed amount of money. Approved cash amounts can range from $1,000 to $100,000 that are received in one lump sum. Such financial products are usually unsecured, so you don’t need collateral on the borrowed funds.
The upside of personal loans is that you’re free to use them in any way you want. Still, specific lenders may impose restrictions on using the funds. Personal loans entail fixed rates, so the initial interest rate will remain the same until you settle the debt.
When it comes to applying, the process won’t take you longer than five minutes, provided you have all the details ready. You’ll have to provide personal information, financial information, and details about the desired loan amount. Before approval, lenders run a hard credit check, which may impact even excellent credit scores.
Last, if your financial standing is satisfactory, the lender will set an amount, the interest rate, and the terms. Expect to get the funds all at once, possibly as soon as the next business day. Most likely, you’ll begin paying it back immediately, and the amount will be the same every month.
Key Features Of Personal Loans
Personal loans provide benefits that may prevail over other types of borrowing. Depending on your immediate financial circumstances, you may opt for a loan with decent terms. Below are several upsides of using this type of financing over other alternatives.
- Fixed interest rate.
- Fixed monthly payments.
- No risk of repossession.
- Boost credit score.
- Bigger than payday loans.
- Easy to qualify.
- Fast and flexible.
Before reaching a final decision, make sure you have a clear purpose in mind. Explore any additional fees in detail and ask for rates from several leading companies. You must also be aware of the support options most loan providers offer. After all, even a modest-sized loan will induce long-term obligations you have to fulfill on time.
When To Get A Personal Loan?
Although you can use personal loans for multiple purposes, some choices are wiser than others. Overall, it’s beneficial if you want to improve your credit score. It’s also smart to use it for educational pursuits with the potential to boost your financial standing.
On the downside, avoid taking out loans to refinance a mortgage or keep up with overspending habits. One plausible use would be for debt consolidation. In case of a high-interest credit card debt, you could save by paying it off with a lower-interest personal loan. Debt consolidation will also provide structured repayment terms.
Home improvement is another reason to go for a personal loan. Generally, it may be a better choice than a home equity loan or line of credit. These involve the threat of losing your home if you default. Also, emergency expenses like car repair or medical expenses may call for a personal loan. This way, you ease your mind even If you haven’t set aside for emergencies.
Personal loans can also help on the occasion of significant life events, such as weddings, divorce, and funerals. In these instances, a quick cash infusion can provide the much-needed funds at the right time. Overall, taking a personal loan makes sense when it’s the least expensive form of credit. Conversely, borrowing money for discretionary expenses like vacations can be costly. It’s better to use savings for nonessential items to avoid excessive finance charges.
Personal Loans Vs. Credit Cards
Overall, customers get lower interest rates on personal loans than with credit cards. This is particularly true for borrowers with good credit. In most instances, the fixed interest and monthly payments of a personal loan are preferable to revolving credit.
Lately, the average personal loan rate has reached 11.84%, whereas the average credit card rate is nearly 16%. Applicants with excellent credit history can further cut rates by 6% to 8%. On top of that, such customers are often eligible for higher loan amounts than the credit card limit.
Many people rely on lenders who offer personal loans to consolidate high-interest debt from several credit cards. In short, unsecured loans with a single, fixed-rate monthly payment is easier to manage. Conversely, a few credit cards entail different interest rates, due dates, and other variables.
Last, personal loans are more suited for expenses you can repay over more extended periods. Alternatively, a credit card is suitable for the things you can pay off monthly. They come with small minimum monthly payments and no deadline for paying your balance off in full. Plus, you can try some tricks to lower your credit card interest rate without too much effort.
The Pros And Cons Of Personal Loans
There are both benefits and drawbacks to opting for a personal loan over other financing options. Here are the crucial factors one needs to consider before borrowing a significant amount of cash.
Personal loan options have several upsides over other financial solutions. So, if you’ve been thinking about a personal loan, here are the pros you should be considering:
- Receive money quickly. Cash gets transferred immediately after approval when you apply in-store. Even online lenders deposit approved funds in your bank account fairly quickly. Applicants can use the requested funds as soon as the next business day
- Bad credit is acceptable. Short-term loan providers approve applications even to customers with bad and poor credit ratings. Meaning, you can get the cash with a credit score of 640 or less. Though rates of personal loans for bad credit tend to be high, they’re more reasonable when compared to payday loans.
- Flexibility. You have the freedom to use the money for anything they wish. Applicants receive the money no matter what they need it for.
- Higher borrowing limits. Unlike short-term solutions, a maximum loan amount can cap at $100,000. Besides, the top personal loans often come with a lower interest rate than those of credit cards.
- No collateral is needed. Unsecured loans don’t require collateral to get approved. Meaning, you don’t have to pledge your apartment, vehicle, or other assets to prove that you’ll repay. Yet, if you don’t repay under the terms agreed to with your lender, you may face severe financial penalties.
- Easier to manage. Borrowers have the chance to repay over a prolonged time. Also, long-term products with a single, fixed-rate monthly payment have reasonable rates. Lastly, they’re easier to deal with than several payments with different interest rates and due dates.
Though downsides are fewer, there are still specific risks involved. Never underestimate the following aspects:
- Surpass standard APR rates. For borrowers with good credit, personal loans mean lower interest rates. Yet, for those with poor credit, such cash infusions could resemble a credit card debt. So, it’s good to check the average credit union and bank interest rates to know what you’re getting yourself into.
- Fees and penalties can get unreasonable. Personal loans typically involve fees and penalties that drive up the cost of borrowing. Origination fees generally range from 1% to 6% of the minimum loan amount and may be subject to change without prior notice. Some lenders also charge late fees or a prepayment penalty when you repay before the end of the term.
- Fixed payments. Credit cards involve a monthly fee and no deadline for paying balances off in full. Conversely, personal loans require a higher fixed monthly payment and must be settled within the loan term. Not everyone can adjust to higher fixed payments without running the risk of falling behind.
- Debt can accumulate. Personal loans can help consolidate debt, but they do not resolve the root cause. The worst part is that paying credit cards off with a personal loan will free up the available credit limit. Hence, you get an opportunity to pile up more charges rather than avoiding expenditures altogether.
- Disreputable lenders. Scam lenders offer fake products and may steal your money and data. If a short-term lender sounds excellent and offers personal loans with unusual rates, check them twice. Find out if the lender complies with all relevant state regulations, too.
How To Choose A Personal Loan Company
Many lenders display essential loan information on their websites, making it easy to compare to other lenders. In short, find loan providers that give their approval requirements without asking for your personal information.
First, check out the APR range. Consider any APR exceeding 40% obscene even if you suffer from not-so-good credit. High APRs lead to overpaying the borrowed loan amount throughout the loan term lengths. Here, you may also need to check the fees and penalties for early payments. Take time to examine any variable charges as the top personal loan companies charge reasonable fees.
Next, find out how long the process lasts. Reputable lenders enable a seamless application procedure and respond to loan requests in no time. They ensure you have access to the approved funds the next business day. Sometimes, you can even get a prepaid debit card loan immediately after approval.
Consider whether the lender accepts far-from-excellent credit applications or not. If you only qualify for a bad credit loan, focus on lenders that approve applications with poor credit history. If the loan you’re considering requires fair credit history and you aren’t eligible, look further.
Last, investigate the lender’s store network and online presence. A reliable loan company should offer you convenient options when it comes to borrowing. A vast network of stores nationwide and the ability to manage loans online is the perfect combination.
How To Get A Personal Loan
To ensure approval, follow the procedure below:
- Know your credit score. Personal lenders take years of credit history very seriously to determine eligibility. Find out the minimum credit score required and apply accordingly.
- Compare offers and get prequalified. Find personalized deals and rates by answering a few simple questions. Here, lenders usually verify your annual income, credit score, and DTI ratio. They conduct a soft credit check and state the loan features.
- Select the preferred offer. Once you have comparable personal loan offers, you can opt for the good match. Check rates, monthly repayments, and customer reviews online. When you’re ready, make your mind up and apply!
Personal Loan Prequalification
Lenders usually give applicants an estimated interest rate of prospective loans. They do so by performing a soft credit check of your credit score. The good news is that soft checks don’t affect credit scores. Hence, it pays off to prequalify with several lenders and compare rates and loan features.
Once you compare the offers and select a product with the lowest rate and payments that fit your budget, apply. Applying may require additional personal information, including employment and education history. Sometimes lenders need to pull your credit reports and verify your income.
All lenders rely on your past financial practices to make sure you can repay as agreed. The list of documents that prove you can meet loan requirements includes:
- Identity and age proof. Provide an ID card, passport, or a driving license;
- Proof of Address. You may submit utility bills or a rental contract or lease, for example.
- Income and employment proof. Consider submitting pay stubs, a salary slip, or a bank account statement.
- Outstanding debt. Provide bank account information plus statements and proof of other debt, including mortgage or auto loans.
Note that some lenders may require further data to verify you’re an eligible applicant.
What Are The Current Personal Loan Interest Rates And Fees?
Interest rates of most personal loans vary by lender and depend on several factors. As a rule, your credit score, income, and debt-to-income ratio are always under scrutiny. Applicants with high credit scores typically receive lower rates from 5.99% to 12%. Borrowers with a minimum credit score might get an annual percentage rate of around 25% to 30%. On average, interest rates on personal loans are as follows:
Note that you may be subject to an origination fee to cover the cost of loan processing. This fee gets deducted from the loan proceeds or goes towards the balance. Also, one-time origination fees get integrated into the loan’s principal, and you pay interest on it, so bear this in mind when comparing costs. Other expenses to pay attention to are late fees, early payment, and insufficient funds fees.
Different Types of Personal Loans
Most personal loans are unsecured and involve fixed payments. However, there are other alternatives, including secured and debt consolidation loans.
- Unsecured personal loans. These don’t require any collateral and hence entail a slightly higher APR range. Approval and rates on unsecured personal loans are based on your credit score and range from 5.99% to 36%. Repayment terms stretch from one to seven years.
- Secured personal loans. Backed by collateral, these products include mortgages (secured by your house title/deed) and auto loans (secured by vehicle titles). The asset can get forfeited if you default on the loan. Secured loan rates are typically lower as lenders consider them less risky.
- Debt consolidation loans. Personal loans are good for debt consolidation since you can roll several debts into a single new loan. Typically, such loans have a lower APR than the interest rate on existing obligations. Consolidating will simplify debt payments by combining all debts into one fixed, monthly payment.
- Installment loans. These loans have fixed rates and monthly payments over the life of the loan. Fixed-rate loans are viable if you want consistent payments and if you’re worried about rising rates on long-term loans.
- Payday loans. Payday loans are short-term, high-cost products with a soft credit check. Cash gets approved quickly, but the fees and interest rates are exorbitant. Payday products may land people into cycles of debt due to predatory lending terms. Every state has different regulations on payday loans.
- ash advances. Cash advances are short-term cash loans taken against the available balance on your credit card. They can be a reliable source of fast money, but you may end up with high-interest debt.
How Does The Coronavirus Affect Personal Loans?
Following the COVID-19 pandemic, most lenders have tightened their qualification standards. Even worse, they limit lending to people with good-to-excellent credit who qualify for the lowest rates. However, there are still loan options available. You need to be wary of the interest rate, the late fees, and the lender’s reputation.
Moreover, borrowers may undergo a stricter verification process due to the COVID-19 recession. Expect to provide more documents to prove income, assets, and debt. To meet the needs of troubled customers, some lenders approve low-rate small loans. Others allow payment relief on existing loans in response to the coronavirus crisis.
Remember that when it comes to the top personal loan, lenders are vying for your attention. Hence, get several quotes and compare all your options before applying. Use an online calculator to determine the good borrowing option for you. Also, always read the fine print, including late fees.
Before taking out the loan, have a repayment strategy. Weigh the pros and cons of a personal loan over other financing alternatives. Once you have the big picture, you can decide whether the overall benefits outweigh the drawbacks before committing.