There are so many types of loans available today that choosing the one for your needs can become very difficult. While some loans are for specific needs, like auto loans for buying a car, home loans for buying a home, or student loans for paying education costs, some loans are more ambiguous.
One of these is the “personal loan.” Personal loans share some similarities with other common loan types, but they are also different in certain ways. Understanding these differences will help you decide what type of loan is best for you and how to go about securing your next loan.
The first thing you need to know about personal loans is that they’re typically unsecured. This means you don’t have to put up any collateral to get a personal loan and will usually just sign a loan contract agreeing to repay the loan. Personal loans also do not require a down payment like home and auto loans typically do.
However, without a down payment and collateral, it’s up to your creditworthiness to secure the loan. If you have bad credit, no credit, or your debt-to-income ratio is too high, a personal loan may not be the best option for you.
Personal loans are available from a variety of different providers, including credit unions, banks, and online finance companies. These different loan providers will usually have a selection of personal loan options, including:
It can pay to shop around, as one personal loan is not necessarily like another. Finding one that works for you can take some time, but it’s often worth it, as your payments, terms, and interest rate will be as beneficial as possible.
One thing to consider as you shop around is how your credit score may be affected if you apply for multiple loans. It’s standard for credit bureaus to count inquiries from auto and mortgage lenders as one hard inquiry, but it’s not quite as clear for options like personal loans.
This doesn’t mean you shouldn’t shop around for the best rate, but be aware of how your credit is being impacted while you do it to make sure you don’t fall from one borrower tier to another.
After you’ve applied for the loan, you’ll likely have to wait for approval; whether it’s minutes, hours, days, or weeks depends on your specific loan and provider. Once you’ve received approval for your personal loan, you should expect to receive a lump sum in the amount of the loan.
That money can be used for just about anything, including consolidating other debts, going on vacation, or making a few improvements in your home like new furniture or appliances.
You’ll have to start making payments on your loan according to the terms you agreed to.
Whatever the terms of your loan, you’ll likely be making payments every month. That means having a plan to afford those payments once the loan is secured. Don’t take out a personal loan you can’t afford; missed payments and defaulted loans can cause your credit to take a nosedive.
Good credit will affect your interest rate on everything from credit cards to auto loans, and beyond. It will be especially important when applying for personal loans, as your interest rate may be based almost solely on your credit score.
Have a plan to repay any loan you’re considering; it’s extremely important to build and maintain your credit worthiness, not just for personal loans, but for your long-term financial future.
Personal loans are usually fairly straightforward, but it’s important to ask questions. This makes it much easier to understand the loan’s terms and what to expect throughout the process. Questions you should consider asking:
It’s also important to ask about any special fees, like early repayment penalties, late payment fees, or anything else that could affect your total repayment amount.
Personal loans can be extremely useful for a variety of financial needs. It’s important to have a plan to repay the money, not to borrow more than you can afford to repay, and not to use it as a supplement for your lifestyle (chronic overspending cannot be remedied with personal loans).
Personal loans are generally simple to understand and provide better interest rates than credit cards for large purchases, making them a great option for many borrowers.
To learn more about your person loan options, contact Partners Financial Federal Credit Union or take a look at our Personal Loans resources online.