Need to get some cash fast to consolidate your debt, fund a renovation or purchase, or pay your bills? A personal loan may be the right choice for you.
In this article, learn more about:
How To Do Personal Loans Work
Personal loans can be used for just about anything. Offered by most banks, credit unions, online lenders, and peer-to-peer lenders, personal loans:
- They are unsecured, meaning they are not backed by collateral like your car or house.
- Come in amounts ranging from $1,000-$100,000.
- Typically have fixed interest rates, meaning the monthly payment stays the same over the life of the loan.
- Interest rates range from 2.49% to 35.99%, depending on your credit score, credit history, income, and other factors.
Applying for a personal loan can typically be done online, and the application process is quick. Once approved, which can take 2-7 business days, the funds will be deposited into your bank account in one lump sum. This transfer can take as little as 24 hours up to one week, depending on your institution and the lender, but once you receive the funds, you can use them for whatever you need.
Then, you’ll start monthly payments on the loan principal and interest.
Reasons To Get Personal Loans
It’s essential to carefully consider your financial situation and goals before taking on a loan, mainly because it can impact your credit score, and you’ll have to pay interest.
However, personal loans can be a great way to finance a large purchase, project, or event you can’t afford to pay for upfront. A few reasons to get a personal loan include the following:
Consolidating Debt
If you have multiple other loans or credit cards, you can use a personal loan to pay off this debt, especially since personal loans can have a lower interest rate, saving you money.
Building Credit History
If you don’t have a long credit history or your credit score could use improvement, taking out a personal loan and making the payments on time each month can help.
Completing Home Improvements
Upgrade your home or complete necessary repairs using funds from a personal loan, especially if you don’t want to get a HELOC or home equity loan.
Paying off Student Debt
You can use a personal loan to consolidate or pay off private student loans.
Funding Higher Education
Even if you have student loans to pay for post-secondary education, those funds typically can’t be used for rent, utilities, books, or other costs. Personal loan funds can help ease that financial burden.
Paying Medical Expenses
Even if you have health insurance, it may not always cover any or all of the cost of a service or procedure, leaving you stuck with a large medical bill. If you don’t have health insurance, these costs can be even higher. Use a personal loan to help pay these bills.
Moving
Moving costs can increase quickly, especially if renting a moving truck and equipment or hiring a moving company. Use personal loan funds to pay for these relocation expenses, buy new furniture or appliances, or handle other costs.
Vacation Loans
Vacation loans are personal loans that are used exclusively for vacation expenses. That can include airfare for travel, renting a hotel room or cottage, rental cars, and spending money.
Wedding Loans
A wedding loan is a type of personal loan that can be used to finance wedding-related expenses. They can cover everything from the cost of a wedding dress, wedding rings, the honeymoon, and other wedding-related bills. They usually have a fixed interest rate and three to five years of repayment.
Auto Loans
Auto loans are a type of loan that is specifically used to finance the purchase of a vehicle. They typically have relatively low-interest rates and monthly payments, making them a popular choice for funding a new car. The loan is generally secured by the vehicle itself, meaning that if you default, the lender can repossess the car.
Covering Emergency or Unexpected Expenses
Protect your savings, and don’t worry about being unable to afford emergency or unexpected expenses by using a personal loan.
Features To Consider Before Taking Out a Personal Loan
Before taking out a personal loan, you should ask yourself the following questions to ensure it’s the right move for your financial situation:
- Why do I need a loan? Make sure it’s essential to borrow. Don’t take out a loan to have the extra funds, mainly because you’ll have to pay interest on it, which means you’ll end up paying more than the original amount.
- What is the cost of borrowing? Add the total price, including fees and interest, to ensure it fits your budget. Some lenders allow you to prequalify without impacting your credit score, which can help you better understand costs.
- Can I handle more debt? Do you already have obligations? Are you struggling to pay it back? If so, it may not make sense to take on more debt (unless you are using it to consolidate).
- Are the monthly payments affordable? Use a personal loan calculator to estimate your monthly payments, be sure it fits into your budget, and you’ll be able to make the payments each month.
Once you’ve decided to take out a personal loan, there is likely one out there that will fit your needs. However, shopping for the best one is essential before applying for a loan. Here are a few features to research and compare:
1. Costs
When you take out a loan, you must make a monthly payment to pay it back. Not only should you ensure your budget can accommodate the price, but consider the two parts: annual percentage rate (APR) and principal.
- The principal is the total amount you borrow, decreasing as you pay it back each month.
- The annual percentage rate (APR) represents the total cost of the loan, including the interest rate and additional fees.
Part of your monthly payment will go toward paying off the loan principal, while the other part will go toward the APR.
Use a personal loan calculator to estimate what rate, loan amount, and term can get you monthly payments you can afford.
2. Repayment Terms
The repayment term is how long you must repay the loan. Often portrayed in months, a personal loan term typically ranges from 12 to 84 months.
The term can affect your monthly payment because the smaller the time, the higher the monthly payment, but the lower the interest costs. The longer the period, the less your monthly payment will be, but you’ll pay more in interest over the life of the loan.
When comparing lenders, look for a term that keeps the payments within your budget and saves you on interest.
3. Loan Amount
Depending on the lender, personal loans can range from $1,000 to $100,000. You should only take out a loan that covers what you need since you’ll be paying interest on the total. Be sure you qualify for the loan amount you need with your chosen lender.
4. Fees/Penalties
Some lenders charge origination fees, application fees, and late payment fees. You could also face prepayment penalties if you repay your loan faster than the term. Read the fine print and understand when you’d have to pay fees or penalties and how much they will cost.
5. Special Features
Some lenders offer additional features to convince you to fund your loan through them, such as quick approval and funding, credit-building tools, financial education assistance, etc. If you have difficulty narrowing down lenders, investigate features they may offer that others don’t.
How To Get a Personal Loan
The process of getting a personal loan is relatively easy and, in most cases, can be done entirely online:
- Start by shopping around and comparing different lenders to find the best term and interest rate for the loan amount you want. You can begin with your current bank and then explore other banks, credit unions, and online lenders.
- Of these lenders, get prequalified if you can. This lets you see your possible interest rates, terms, and monthly payments before applying. And, because this only requires a soft credit check, your credit score will not be impacted.
- Once you’ve decided which lender to choose, it’s time to apply. You can fill out an application online, or you may have to initiate the process in person at a local branch.
- Once you submit your application, it will be reviewed by the lender. They will contact you if they need additional information, but typically you will hear within 7-10 business days whether or not you were approved.
- If approved, you’ll receive the funds deposited in your account in as little as 24 hours or up to a few business days. If you weren’t approved, consider adding a co-signer or choosing a secured personal loan.
This post originally appeared on Credello and was syndicated by Wealth of Geeks.