A personal loan can be a great tool in a number of situations. Sometimes it can be a smart option to consolidate debt or to pay for planned expenses like home improvements, college tuition, or a wedding. It can also be useful when we find ourselves surprised by things like unanticipated medical costs, a surprise tax bill, or funeral expenses.
Understanding how personal loans work is the first step in determining whether or not it’s a good option for you and your situation. With that in mind, here’s what you need to know.
What are personal loans?
The loans most people are familiar with are those that are backed by some sort of collateral. Collateral is something that the borrower pledges in order to secure the loan (and something that could be lost if he or she fails to make the loan payments!) For example, with a home loan, the home is the collateral. With a car loan, the car is the collateral.
Most personal loans are unsecured. That means that you don’t have to come up with any collateral in order to get the loan. Instead, the lender looks at your creditworthiness and current situation to determine if you qualify, and to set the terms of the loan.
The loan itself is normally an installment loan. That means that you receive a lump sum of money and then repay it with monthly payments over the life of the loan. The life of the loan is usually anywhere from two to 7 years.
What will lenders want to know?
At the most basic level, lenders want to know the likelihood that you will repay the loan on time each month. To determine that, lenders look at a number of factors. As you would imagine, your credit history and credit score are key. But they could also look at your income, your other debts, your savings and investments, and more.
What are the interest rates like with personal loans?
This is where a good credit score comes into play. A higher credit score can increase the likelihood of you being approved for the loan and may help you qualify for a lower rate – which means you pay less for the loan in the long run.
In general, personal loan interest rates can be lower than credit cards. But it depends on your credit score and the other factors that lenders look at when evaluating your situation.
How to get a personal loan.
Applying and getting approved for a personal loan can be surprisingly easy. Today, you can apply online. You can get a decision in minutes. And you can get the money quickly (many times it’s the next day.) This ease and convenience has made getting a personal loan a smart option for many.
If you’d like more information, visit our personal loan page. Got questions? We have folks ready to answer them. Just call us at (833) 450-1424. Or, send us an email. And for more great help when it comes to understanding everything loan related, check out the Borrowing Like A Boss ebook.