Personal Loans Guide

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Simply put, a personal loan is money that you borrow 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 debts, personal loans 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 out a personal loan, you and your lender will agree to a few standard terms, including:

  • Type of Debt:  Here, you’ll be dealing with installment debt vs. revolving debt. Installment debt allows you to pay off your debt in monthly installments, like a student loan. With revolving debt, you can borrow as much as you need to up to a specified limit, repay the debt, then borrow more, as you would with a credit card.
  • Interest Rate:  Generally, personal loans have fixed interest rates, which means your monthly payments will always remain the same.
  • Type of Loan:  Personal loans generally come in the form of secured or unsecured loans, which we’ll get into more later.

While personal loans are 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 to your debt. If you are interested in taking out a personal loan, there are a few things you should understand, beginning with secured vs. unsecured loans.

Types of Personal Loans

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

- Secured Loans

Secured loans 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 loan, 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 out a personal loan -- particularly if your credit score is on the lower end. A secured loan will also allow you to take out a larger loan 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 Loans

Unsecured loans don’t require you to put up any collateral whatsoever. Instead, these loans 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 an unsecured loan at all without a cosigner. If you are able to take out an unsecured loan 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 an unsecured loan 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 as a personal loan, there are several key factors you need to consider in order to to evaluate the total cost of your loan.

- Determine How Much You Need

First, you need to decide how much you need to take out. Personal loans are generally provided in amounts up to $35,000. However, you should be sure not to ask for more than you need as this could lead to higher interest rates and less favorable loan 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 of your loan. Interest rates for personal loans 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 loans 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 loan.

- Length of Loan

Personal loans can generally be paid off in anywhere from one year to 20 years. Just like with any other loan, 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 your loan 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 of loans you’ll qualify for. Generally speaking, a credit score of at least 680 should be good enough to get you a few reasonable offers.

Personal Loan Advantages and Disadvantages

Any loan, be it a personal loan, student loan, or auto loan, is going to come with its own advantages and disadvantages. This pros and cons list should help you determine whether or not a personal loan would be 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. Personal loans can offer a quick solution to help you stay afloat during these times.
  • Fixed Interest:  Thanks to the way personal loans are typically set up, you can expect to make one standard monthly payment for the duration of your loan, making it much easier to budget around it.
  • Improve Your Credit:  Personal loans can be a great way to boost your credit score by adding to your credit mix. Note that you should absolutely not take out a loan for the sole purpose of boosting your credit, but it can be an added benefit.

- Cons

  • Can Damage Your Credit:  While paying off your loan on time can help boost your credit, neglecting to pay off your loan based on your agreement 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 personal loans are unsecured means that your interest rates are likely to be significantly higher than a secured loan.

All things considered, personal loans provide incredible benefits while the disadvantages generally only present themselves when a loan is 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 out a personal loan.

How to Get a Personal Loan

Once you fully understand the pros and cons of taking out a personal loan and have evaluated how much you can afford to take out, it is time to begin the process of applying for your loan. 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 loan 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 Loan 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 of your loan, including:

  • Total fees
  • Interest rates
  • Length of Loan
  • 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 Personal Loan 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 loans 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 loan terms, cost of loans, 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 for your personal loan 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 a personal loan. 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 loan 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 percent rate (APR), is one of the most important factors to consider when determining the long-term cost of your loan. Using a loan 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 loan with a lower APR than vice-versa.

- Be Aware of Additional Fees

Beyond your interest rate and the length of your loan, fees can add additional costs to your loan that you may not expect. Your lender may charge an origination fee of anywhere from one to five percent of the total amount of your loan. 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 with your loan. This will help you determine the full cost of your loan so that you can more accurately compare your offers.

Personal Loan Alternatives

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

- Peer-to-Peer Loans

Peer-to-peer loans are very similar to personal loans 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 loans allow you to take out loans 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 than personal loans. 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 than taking out a personal loan.

Frequently Asked Questions

- Can I Qualify for a Personal Loan with Bad Credit?

If you have a poor credit score, you’re not completely out of luck. Many loan 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 loan, granted you have property which 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 loan will be a great boost for your credit score in the long run.

- What Can a Personal Loan be Used For?

Unlike many other types of loans, such as student loans 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 for a Personal Loan?

As you might expect, every lender will have its own requirements. However, certain requirements are fairly standard for almost any loan 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 a personal loan 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 loan 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