Are you looking to consolidate credit card debt, pay for medical bills, fund some home renovations, or cover moving expenses? If you are, a personal loan may be perfect for you. The world of loans and money lending can be daunting; but, don’t worry — we’re here to help you get the resources you need to boost your own financial success.
What is a personal loan?
In short, it is a loan that is not secured by collateral like a house or car (like a mortgage or car loan). This means that a lender cannot seize your assets if you fail to pay your loan back. However, your credit score will be affected in the event that you default on payments.
What is a personal loan used for?
Some common things that personal loans are used for are the following:
- Consolidating credit card debt
- Medical bills
- Home repairs
- Moving expenses
Is a personal loan right for you?
This depends on your credit score and how you plan to use the loan. Personal loans are ideal if you know you will make each payment and plan to pay the loan off quickly.
If you’re looking to improve your credit score, moving credit card debt to an installment loan like this will help lower your income-to-debt ratio and diversify the types of debt you have – both of which can help to increase your score.
One thing to remember is that personal loans come with higher interest rates than secured loans and some credit cards. Those with excellent credit can benefit from credit cards that have 0% interest on balance transfers for a year or more, so this may be a better option. Remember that the lower your credit score, the higher the interest rate on your loan.
Where do you get a personal loan?
The three best places to get a personal loan are credit unions, banks, and finance companies. Although credit unions and banks are probably the biggest players in lending money, finance companies also offer easy, mostly online, ways to get loans.
Understand Interest Rates
Knowing and understanding the interest rates associated with a personal loan will help you determine which loan fits you best. Interest rates on loans are determined by your credit score, your income, and your current debt and will likely fluctuate depending on the financial institution or company offering the loan.
Generally, the lower your credit score, the higher the interest rate will be, and you won’t be able to borrow as much as someone with a higher score. Common rates are between 6% and 10%.
You can calculate what your interest rate may be with a personal loan calculator such as this one from NerdWallet.
Unsecured vs. Secured Loans
Personal loans generally fall into the category of “unsecured loans,” which means they do not require collateral (usually a house or a car). That makes them more risky for the lender, and they typically have higher interests rates because of that risk.
Secured loans, like a mortgage or car payment, require collateral and, as such, are less risky for the lender. This leads to lower interest rates and a little more flexibility around credit history.
Many loans will give you the opportunity to have a co-signer on the loan with you. A co-signer is someone who legally accepts that they will be responsible for the loan if you are unable to repay it.
You are more likely to be approved and receive lower interest rates with a co-signer. You might qualify for a better loan with a co-signer who has a better credit score and credit history than you, but missing payments will negatively impact not only you, but your co-signer as well.
Having a co-signer is a great option if you are working on building credit and boosting your credit score.
Pick the right payment terms
Personal loans have a fixed term. The length of the term will depend on the amount you can pay each month until the loan and interest are paid in full. Most payment plans are less than five years.
You can use a few different loan repayment calculators to estimate what the repayment plan for your loan might look like.
- Bankrate Personal Loan Calculator
- net Personal Loan Calculator
- Credit Karma Simple Loan Calculator
- Smart Asset Personal Loan Calculator
Read the Fine Print
As with any financial agreement, definitely, read the terms of the loan before you sign anything. Watch out for information such as the following:
- APR surprises
- Automatic withdrawals
- Pre-payment penalties
- Payments reported to credit bureaus
- Flexible payment features
- Direct payment to creditors
The Bottom Line
The most important thing to do before settling on a loan is research. Know your needs and if the loan you’re looking into will help you reach your goals. Shop around for the best interest rates and payment terms that you can get and, finally, make sure you can afford the monthly payments.