What is a Personal Loan?
Personal loans are defined by two basic characteristics. First, personal loans do not require collateral, in contrast to a car loan, which is backed by the value of your car, or a mortgage, which is backed by the value of your home. Secondly, a personal loan is an amortizing loan, meaning the balance goes down every time you make a payment, eventually repaying your balance in full.
The main characteristic of a personal loan is that it is not secured by collateral. “Collateral” means something of value, like a home, boat or car that the lender can repossess if you don’t repay the account as agreed. Personal loans are backed only by your promise to repay, and for this reason, they are also known as “signature loans” or “unsecured loans.” This kind of financing usually (but not always) comes with a fixed interest rate and a term ranging from one to five years. Unsecured loan amounts vary, but most run between a minimum of $1,000 and a maximum of $50,000.
Personal loans are typically used for two main purposes:
- Paying for personal expenditures — The good thing about personal loans is that they can be taken out for virtually any reason and you can easily get Personal Loans Online approval. Some common reasons include paying a large medical expense, making a home or car repairs, or to pay for a vacation (though we wouldn’t recommend borrowing money to go to Disneyland).
- Refinancing existing debt — Personal loans are excellent for refinancing high-interest debt at a lower interest rate. For example, it can make sense to use a personal loan to consolidate and refinance high-interest credit card debt. Reducing your interest rate from a common credit card APR of 18% to a personal loan rate of 10% or less can save you a fortune in interest. Personal loans are very common. In addition to traditional banks, there are also many different online loan providers where you can apply for a personal loan and get an instant or nearly-instant decision on whether or not you qualify for a personal loan for your specific needs.
Qualifying for a Personal Loan
Because the lender must rely solely on the borrower’s willingness to repay the loan as agreed, credit scoring is extremely important — it’s widely believed that the way you’ve managed your obligations in the past is highly predictive of your performance when borrowing in the future.
The lender takes your application and verifies your income and debts. Your income and debt picture influence the amount the lender is willing to advance you and how long it is willing to lend the money. The lender also pulls a credit report, examines your scores and assigns you a credit grade.
Depending on your credit grade, loan amount and the length of time you wish to borrow, your personal loan rate will likely fall between six and 36 percent. Rates and terms vary considerably, so it’s wise to shop a bit and obtain quotes from several competing lenders.
Personal Loan Uses:
What can you use a personal loan for? Signature loans can be used for just about any purpose, from consolidating debt to funding investments or financing big-ticket purchases. Borrowers should compare personal loans to other types of financing — for example, if buying a car, secured auto financing is probably cheaper, and if funding an education, government-backed student loans might make more sense. However, unsecured loan interest rates are likely to be lower than those of credit cards, and personal loans can make budgeting easier with their fixed rates and unchanging payment schedule.
7 Uses for Personal Loans:
- Debt Consolidation
- Education Expenses
- School Books
- College Tuition
- Pay off credit cards
Would a Credit Card be cheaper?
Potentially, yes. However, the answer depends on what you’re buying, when you’re buying it, how you intend to pay the money back and your level of self-discipline!
Personal loans come in a lump sum – you have a predetermined amount of time to pay them off. By contrast, credit cards are a revolving form of borrowing, so they can theoretically last a lifetime. You borrow what you need when you need it (subject to a card’s monthly limit) and you have to make at least a minimum monthly payment on your balance. This can tempt borrowers into only paying the minimum and making additional purchases, later on, resulting in indefinite debt. Credit card interest rates are generally variable, but cards often come with a promotional fixed-rate introductory period.
Using the wrong credit card could cost you more because credit cards tend to have higher rates than personal loans. However, a card with a promotional rate of 0% on purchases could be a smart option, if you can get approved with the credit limit that you need.
Finally consider any other fees (application, monthly or annual fees), any offers/rewards and the length of the application/approval process before settling on a credit card, personal loan or another form of credit. Don’t forget that you’ll pay a charge each time you withdraw cash on a credit card.
What should I look for in a personal loan?
There are a few key features you’ll want to consider when comparing loans. To find the best deal, ask yourself these questions:
Applying for Personal Loans Online:
The process of applying for Personal Loans Online is pretty straightforward. The lender will ask for pertinent information about you, including how much you earn, how much you spend on rent or mortgage payments, where you live, and how much you’d like to borrow. It doesn’t take much time to get Personal Loans Online approval. Some may also ask for bank statements and other financial forms.
The lender decides whether or not to approve you for a loan, and what interest rate you’ll pay, based on the information you supply to them. After approval, the step-by-step process goes a little like this:
- You receive your loan disbursement — Some lenders do this by check, but most now simply send the money to your checking or savings account via electronic transfer, which puts the money in your account in as little as 24 to 48 hours. The speed at which you can get approved for a personal loan and get access to the amount you borrow is one of their biggest perks.
- Repayment — Personal loans typically require monthly payments to repay your balance. During the repayment period, you will be responsible for making a consistent monthly payment to repay your balance over time. For example, $5,000 36-month loan at an 8% APR would require monthly payments of $156.68 every single month. After 36 months, the loan will be repaid in full, and you won’t need to make any additional payments. Tip: Some lenders will give you a discount on your interest rate if you agree to automatic drafts from your checking account to pay your loan each month.
- Payoff — When your loan is paid in full, you’ll receive a payoff notice declaring that your loan has been repaid. If you’d like to pay the loan off earlier than originally planned, speak to your lender about getting a “10-day payoff” amount. This is the amount of money you currently owe on the loan, plus 10 days’ worth of interest. This ensures that you pay enough to take the balance all the way to zero. You don’t want to bother with having to write a check for a trivial amount (say…$0.08) a month later.
Why get a Personal Loan?
To get a personal loan can be a good idea if you need financing for a certain purchase or expense that cannot be financed less expensively with a traditional secured loan. Here are the three occasions in which it makes sense to consider a personal loan.
- You need cash for a personal expense. If you need to borrow money to buy a car or home, there are loans specifically designed for those needs. But if you need money for moving expenses, a wedding, credit card consolidation, home improvements, or a myriad of other personal expenses, a personal loan is often the only way to borrow the money you need.
- You want to refinance high-interest debt. Personal loans are an excellent way to reduce the interest you pay on a debt, and the monthly payment required to pay it off. While the average credit card carries an interest rate of 18% or more, many people qualify for personal loans with rates in the single digits.
- You need more time to repay. The advantage of personal loans is that they offer repayment terms as long as 5 years for qualifying borrowers. While a 0% intro APR credit card may be a better option if you just need a few months to pay off a balance, a personal loan makes more sense if you need more time to pay off your balance. A 0% intro APR credit card will reset to a much higher interest rate after the promotional 0% APR expires.
Now we hope after reading this article, you would now know all about What is a Personal Loan? Why get a Personal Loan? What should I look for in a Personal Loan?, Applying for Personal Loans Online and also about Personal Loans Online approval.