Personal Loans

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Simply put, a personal loan is money borrowed from a bank, private lender, or credit union to be used for just about anything you need. Whether you want to take a big vacation, pay for a car, or consolidate your obligations, these can be a great option as they are paid out in a lump sum and can be paid off over a number of years.

When you take one out, you and your creditor will agree to a few standard terms, including:

  • Type of Payments: Here, you’ll be dealing with installment vs. revolving debt. The installment variety allows you to make monthly payments towards your debt, like a student borrowing. With revolving, you can borrow as much as you need to up to a specified limit, repay the outstanding balance, then borrow more, as you would with a credit card.
  • Interest Rate: Generally, these have fixed interest rates, which means your monthly payments will always remain the same.
  • Secured Vs Unsecured: Personal liabilities generally come in the form of secured or unsecured, which we’ll get into more later.

While it's a fantastic option when you need or want to make a large purchase, it is important to consider whether or not this purchase is worth adding. If you are interested in taking one out, there are a few things you should understand, beginning with secured vs. unsecured.

Types of Collateral

You don’t exactly have a plethora of options when it comes to your liabilities. You’re either going to get a secured or unsecured, both of which have their benefits and drawbacks.

- Secured

Secured obligations require you to put up a piece of your property, typically a car or house, as collateral. If you are unable to pay back your obligation, your lender will sell your property to pay off your debt.

While you might be hesitant to put up a piece of your property, doing so would make it much easier to take one out -- particularly if your credit score is on the lower end. A secured obligation will also allow you to take out a larger balance and at lower interest rates. Of course, you should only really consider this option if you are sure you will be able to pay it back.

- Unsecured

Unsecured don’t require you to put up any collateral whatsoever. Instead, these are based entirely on your creditworthiness. Obviously, this might be preferable if you have a higher-than-average credit score; however, if you have a poor credit score, then you likely won’t be able to take out the unsecured version without a cosigner. If you are able to acquire one with a poor credit score, you can expect it to come with significantly higher interest rates as your lender is going to be looking to protect itself in case you are unable to pay it back.

If you default on your obligation and don’t have a cosigner, your lender won’t be able to take your property, but they may choose to send your debt to a collection agency or take you to court.

How Much Can You Afford to Take Out?

When determining how much you can afford to take out, there are several key factors you need to consider in order to evaluate the total cost.

- Determine How Much You Need

First, you need to decide how much you need. Most structures generally provide amounts up to $35,000. However, you should be sure not to ask for more than you need as this could lead to higher rates and less favorable terms.

- Interest Rates

Your interest rate, or annual percentage rate (APR), is one of the most important factors when trying to evaluate the total cost. These vary quite a bit depending on your credit score, your income, and whether or not you are able to put up property as collateral. As most personal debts are unsecured, your lender is taking on a much larger risk, so your interest rates are likely to be higher than they would be for a home or auto.

- Length

Most of these contracts allow for payment terms anywhere from one year to 20 years. Just like with any other debt, longer repayment terms are going to lead to higher amounts paid in interest over time, so you need to figure out the shortest amount of time that you can repay without risking late payments.

- Check Your Credit Score

To get a better understanding of the types of offers you can expect to receive, you need to do a thorough review of your finances, including your credit score. Using a free tool such as Credit Karma or Mint can give you a good idea of the types you’ll qualify for. Generally speaking, a credit score of at least 680 should be good enough to get you a few reasonable offers.

Advantages and Disadvantages

If you decide on this option, it comes come with its own advantages and disadvantages. This pros and cons list should help you determine whether or not it's worthwhile for you.

- Pros

  • Paying for Emergencies: Car accidents, illness, and natural disasters are just a few events that can present some unexpected expenses that you may not be able to afford. This options can offer a quick solution to help you stay afloat during these times.
  • Fixed Interest: Thanks to the way these debts are typically set up, you can expect to make one standard monthly payment for the duration of your contract, making it much easier to budget around it.
  • Improve Your Credit: Also, these can be a great way to boost your credit score by adding to your credit mix. Note that you should absolutely not take on this type of balance for the sole purpose of boosting your credit, but it can be an added benefit.

- Cons

  • Can Damage Your Credit: While paying off your obligation on time can help boost your credit, neglecting to make regular payments can ruin your credit score.
  • Borrowing Too Much: Taking out more than you need can cause you to develop poor financial habits. Relying on credit to pay for all of your expenses just because it’s easy to obtain can restrict your ability to grow financially.
  • Higher Interest Rates: While fixed interest rates are a huge positive, the fact that most of these debts are unsecured means that your interest rates are likely to be significantly higher than a secured one.

All things considered, they provide incredible benefits while the disadvantages generally only present themselves when handled irresponsibly. As long as you have done your research and accurately evaluated how much you can afford, you should be able to avoid any of the cons associated with taking one out.

How to Get a Personal Loan

Once you fully understand the pros and cons and have evaluated how much you can afford to take out, it is time to begin the process of applying. Here’s how you can expect this process to play out:

- Finding a Lender

First things first, you need to find a lender that fits your specific needs. If you are in a good financial situation with a high income and credit score, your priority is probably to find the best offer possible. On the other hand, if your credit score is less than ideal, your only goal might be to just get approved.

Next, you should read reviews to ensure that each lender you look at is credible. Unreliable lenders may entice you with offers such as ‘no credit check loans,’ but are sure to take advantage of you. Reviews can help you avoid costly scams and prevent you from wasting your time.

Lastly, you should compare every lender you look at to find the best offer available. Banks, credit unions, and private lenders will all have their own fees, terms, and interest rates. You should never limit yourself to just one option.

- Completing Your Application

Once you’ve found the perfect lender for you, you need to fill out an application. Your application will ask you for information such as:

  • Your Social Security number
  • Proof of employment
  • Proof of income
  • Proof of identity, including your driver’s license, passport, or birth certificate
  • Bank account information

In addition to this information, your lender will perform a hard credit check and may even ask for additional documentation such as bank statements and proof of education. Lenders looking at your life this thoroughly are usually prepared to offer better terms than those with a less complete picture of your life, but its extra important you feel you can trust any company you give that much info to!

After your application is completed, you can stay in contact with your lender to receive updates on the progress of your application. You can typically expect your application to be processed anywhere from one day to two weeks.

- Signing Your Agreement

Finally, after your application has been approved, your lender will provide you with a formal offer.

In this offer, you’ll find all the details and terms, including:

  • Total fees
  • Interest rates
  • Length
  • Disbursement details

You should carefully review this document to ensure that all of the details are as expected. If you agree to all of the terms in the offer, then it’s time for you to sign the agreement Once the agreement is signed, you can expect to receive your funds shortly after.

Best Lenders

As APRs can range from 4% all the way up to 35%, it is crucial that you do your due diligence to find the best lender possible. Additionally, you’ll find that some lenders are much more flexible than others. For example, one lender may only offer options from $10,000-$20,000 to be paid off in up to three years, while another lender may offer up to $50,000 to be paid off over five years. Depending on your needs, you may need a lender that offers more flexibility.

If you need help finding the best lender for you, check out this guide from consumersadvocate.org. They take into account contract terms, cost , qualifications, and lender reputation when determining their top lenders. While you may not find your ideal lender in this list, it is certainly a good place to start looking. As with all ad-supported websites, make sure to be a critical consumer and note which companies are paying for promotion. It doesn’t mean those companies are bad, just that you always need to carefully do your homework, especially when it relates to your finances.

Tips to Find the Right Personal Loan

Here are a few tips to make shopping a much less stressful experience:

- Get Pre-Approved

Don’t make the mistake of taking the first offer that you come across. As with almost anything, it is important to keep your options open when searching for an option. Applying for pre-approval with multiple lenders is a great way to do this.

When you apply for pre-approval, you will have to provide fairly standard information, such as your name, birthday, contact information, and what you plan to use the money for. Additionally, lenders may perform a credit check. In this case, make sure it is a soft credit check to ensure that it doesn't affect your credit score. Generally, when you are a pre-approved, a lender will be able to send you a few offers based on the information you provided.

- Compare Interest Rates

If you have multiple offers from different lenders, it’s important that you make the effort to compare the interest rates between them in order to find the best deal.

Your interest rate, or annual percentage rate (APR), is one of the most important factors to consider when determining the long-term cost. Using a comparison tool is a great way to make sure that you find the best deal possible. You’ll find that, in many cases, it might be more cost-effective to take out a larger balance with a lower APR than vice-versa.

- Be Aware of Additional Fees

Beyond your interest rate and the length of your obligation, fees can add additional costs that you may not expect. Your lender may charge an origination fee of anywhere from one to five percent of the total balance. In some cases, your lender may not charge any additional fees at all; however, this may lead to higher interest rates.

A reliable lender will always be upfront about all of the fees associated. This will help you determine the full cost so that you can more accurately compare your offers.

Alternatives

While personal loans are a great option for many financial situations, you can always explore alternative options, too.

- Peer-to-Peer

Peer-to-peer are very similar in that they allow you to borrow money at a fixed interest rate to be paid off over a certain amount of time. Peer-to-peer lending allow you to take on debt without interacting with any financial institutions. However, this type of lending is not highly regulated, so you should proceed with caution if you choose to go this route.

- Credit Cards

In some situations, credit cards may offer more benefits. Particularly, a credit card may be ideal for short-term purchases as many credit cards offer introductory 0% APR for a year or longer. However, credit cards do not offer a fixed repayment length, which can lead to the development of poor financial habits.

- Cash-out Refinancing

If you are committed to your home for the long-term, then cash-out refinancing, also called a home equity line of credit, might be a good option for you to meet your financial needs. However, this alternative is definitely risky as you could end up in trouble if home prices were to suddenly drop.

While these alternatives may not be able to satisfy your financial needs, it’s still important that you remain aware of all your options. In some situations, you might find that one of these options offers lower long-term costs.

Frequently Asked Questions

- Can I Qualify with Bad Credit?

If you have a poor credit score, you’re not completely out of luck. Many providers will have options for individuals with bad credit; however, these options will always be more favorable for the lender than they will be for you. You also, of course, may still be eligible for a secured, granted you have a property that you can put up as collateral. Note, of course, that if you are able to get approved then making timely payments for the life of the contract will be a great boost for your credit score in the long run.

- What Can The Money Be Used For?

Unlike many other types, such as student lending or mortgages, personal loans can be used for almost anything. Common uses include debt consolidation, home renovations, medical expenses, and paying for a vacation.

- How do I Know if I Qualify?

As you might expect, every lender will have its own requirements. However, certain requirements are fairly standard for almost any provider, such as:

  • You must be at least 18 years old
  • You are currently employed
  • You have a bank account
  • You have a valid work and home phone number as well as a working email address

Aside from these, you will need to contact your lender to learn all of the qualifications.

- How Long Does it Take to Receive My Money?

If the reason that you need money is time-sensitive, you might be concerned that your money will not be available in time for you to cover whatever expenses you may have. Fortunately, you can generally expect to receive your funding within one or two business days after being approved.

- What Happens if I Make a Late Payment?

If you expect that you will not be able to make a payment on time, the best thing that you can do is to contact your lender. Most lenders will work with you to set up a payment extension. After all, they would rather it take a little bit longer to get their money than to not get it at all.

Typical cost is

$897/Month

Based on a $10,000 loan, excellent credit score with a 14% interest rate on a 1 year term