What is a personal loan?
A personal loan, much like a traditional bank loan, is an amount of money you borrow from a bank, online lender, or other accredited financial institution and pay back in fixed monthly installments. They do have some unique features that set them apart, as well as reasons for choosing them over traditional financing.
For one, personal loans tend to have set ranges for interest rates and loan terms, and are usually unsecured—they’re not backed by collateral such as your car or home. Additionally, these loans have shorter repayment terms (ranging from two to five years in many cases) and are available to a much wider audience with varying credit scores.
Finally, they’re better than credit cards in many cases as you can usually find lower interest rates and fixed repayments over revolving credit with higher monthly interest. Overall, personal loans are meant for short-term needs such as large expenses or emergency situations such as medical emergencies, as opposed to long-term purchases.
What to Consider Before Taking a Personal Loan?
- Understand the real cost of your loan with a personal loan calculator
- Get a free credit report, or use a service that helps you learn about and improve your scores
- Determine the amount you want to borrow, and the repayment term that will let you pay it off comfortably
- Find a trusted co-signer with better credit that can help you get your loan at more favorable rates
- Compare available interest rates, loan amounts, and repayment terms to find an option that suits you
- Read the fine print when it comes to fees, late payment penalties, and forgiveness options
When Should I Get a Personal Loan?
There is no single answer to the question of when a personal loan is a good idea. Even small personal loans can help you remodel your kitchen or help finish paying off your new home theater system.
How To Get a Personal Loan in Eight Steps
- Check Your Numbers – Before filling out a single application, you need to understand your financial picture. you should have an idea of your debt-to-income ratio, as well as have a record of your monthly income. Moreover, having a bankruptcy in the recent past could affect your chances to get approved.
- Check Your Credit Score – The next step is to examine your credit score, which is a vital component in deciding your loan terms. You can request a free credit report once a year, or sign up for a service that gives you more regular access and help improving your scores.
- Check your Options – Shop around for a few different alternatives. While you may not want to apply to all of them (due to the impact on your credit score) understanding what’s out there makes it easier to find the right personal loans online. You should also look for differences between banks, online lenders, and credit unions for different terms and benefits.
- Choose your Loan Type – Personal loans are available for different purposes which sometimes come with different rates. Additionally, some lenders may offer fixed or varied interest rates, as well as secured or unsecured loans. It’s important to know how each of these affects the loan you’ll eventually get.
- Check the Best Rates – While it may be tempting to go with the first option you find, it pays to be patient. Before opening an application, shop around for different options with your financial record in mind to find the best possible rates. This may not necessarily mean the lender with the best available rates, but one that fits your credit profile.
- Choose a Lender and Apply – Once you make your choice, you can easily start an online application for your personal loan. Most lenders today handle much of the heavy lifting, and you can be approved for a loan in as little as one day in many cases.
- Provide Necessary Documentation – Before they make it official, most lenders will ask you to provide documentation to support your application. This may include records of your income such as paystubs or W2 forms, bank statements, utility bills or proof of residence, and other financial information that may help your application.
- Accept the Loan and Start the Payments – Once approved, you’ll receive your funds and have full access to them. Additionally, you’ll also have to start making payments. Make sure you’ve planned ahead and try to make consistent payments to avoid any fees or problems down the line.