A personal loan is a way to borrow money without putting up collateral. The money can be used for consolidating debt or making a large purchase. Personal loans are popular because they often have lower interest rates than credit cards and other loans.
How Do Personal Loans Work
Banks, credit unions, and online lenders usually issue personal loans. When you apply for a personal loan, the lender will review your credit history and other financial information to determine if they will approve your application. Once your loan is approved, the funds can be used for whatever purpose you need them for.
Most personal loans come with fixed interest rates, which means your monthly payments will stay the same. Personal loans are usually unsecured, too, meaning there’s no collateral (like a savings account or piece of property) backing up the loan. You may have to use collateral to get approved if you don’t qualify for an unsecured personal loan. You could also ask a friend or family member to co-sign on your personal loan, which would help you get approved.
Reasons to Get a Personal Loan
You can use a personal loan for almost anything: There are no restrictions on using the money you borrowed. You can use a personal loan to cover expenses, from home repairs to car purchases. It can also be used for debt consolidation, medical bills, travel costs, etc.
Interest rates are usually lower than credit card rates: If you carry a balance on your credit cards, you know how quickly the interest can add up. A personal loan can lock in a lower interest rate and save on interest charges.
Personal loans can help you build your credit: If you make your payments on time and in full, taking out a personal loan can help you build your credit. This is because personal loans appear as installment debt on your credit report, which lenders view positively. When you shop for a personal loan and get multiple offers, that hard inquiry will only result in one ding on your credit score. This is unlike credit cards, where each new application results in an inquiry that can temporarily lower your score.
You may get a 0% APR introductory rate: With some personal loans, you may qualify for an introductory rate of 0% APR. This means you won’t have to pay any interest on the loan for some time (usually 12 to 18 months). This can be helpful if you need to finance a large purchase and want to save on interest charges. Just be sure that you’ll be able to pay off the loan before the intro period ends, or you’ll be stuck with a much higher interest rate.
You’ll have predictable monthly payments: With a personal loan, you’ll know exactly how much your monthly payment will be and when it’s due. This can help with budgeting and make it easier to ensure you get all the payments. On the other hand, credit cards often have variable rates and due dates that can change monthly—making it harder to track what you owe.
Points to Remember Before Getting a Personal Loan
Before you take out a personal loan, it’s important to understand what you’re getting into. Here are some points to consider before signing on the dotted line:
Understand the interest rate and fees associated with your loan: Make sure you know exactly how much you’ll be paying in interest and fees for your loan. Some lenders may charge origination fees or other additional costs, which can add up quickly.
Check your credit score: Before you apply for a loan, get a copy of your credit report and check it for any errors. You should also get an estimate of your credit score and compare it with the lender’s minimums. A credit score of 560-660 and higher is usually necessary to get approved for a personal loan. If you don’t meet their requirements, you may get denied—so it’s a good idea to get help fixing your credit score if needed.
Review the loan terms carefully: Ensure you understand the repayment schedule, late fees, and other penalties for not making payments on time. You should also check for any prepayment penalties that could be charged if you decide to pay off your loan early.
Shop for the best deal: Compare offers from various lenders to get the best rates and terms available. In addition, look into any special promotions they may have that could get you a lower rate or waive certain fees. With some research, you’ll be able to find a loan that fits your needs and budget.
There are several compelling reasons for considering taking out a personal loan. From consolidating debt to financing a large purchase, personal loans offer many benefits over other borrowing options like credit cards or home equity loans. Be sure to shop around for the best rates and terms before applying for a personal loan so that you can make the most of this financial tool!