Are you struggling with credit card debt and looking at your options? Or planning to borrow money for a large purchase?
You’ve probably heard about personal loans, but you might be confused about exactly how they work.
Personal loans vary from other methods of borrowing, like using credit cards or getting payday loans, and we’ve explained the key differences below.
So, what is a personal loan? You’re about to find out.
What is a Personal Loan?
A personal loan is money that you borrow from a bank, then pay back in fixed monthly payments. Most personal loans will be paid back over two to five years.
Interest rates will vary according to the bank you choose, your credit history, and how much you’re borrowing. You can expect rates to be somewhere between 7 and 36 percent APR.
Personal loans can generally be used for anything you want. For example, you might use a personal loan to pay for a home improvement or purchase a new car.
How Does a Personal Loan Compare to Other Types of Borrowing?
Personal loans are unsecured, meaning they’re not backed up by collateral. This means that you won’t lose an asset like a property or vehicle if you default.
Did you know that the average American household has $8,284 in credit card debt?
Compared to credit cards, personal loans tend to have lower interest and allow you to borrow larger amounts. For this reason, personal loans are sometimes used to consolidate credit card debt.
If you qualify for a personal loan, it’s sometimes a better option than spending on a credit card.
How Do You Get Approved for a Personal Loan?
Lenders will look at your income, credit history, and other factors before deciding whether or not to approve your request for a personal loan.
Got a terrible credit history?
Don’t despair – you may still be eligible for a personal loan, although the interest rate is likely to be much higher.
It’s smart to compare personal loans from multiple providers before you settle on one, as the interest rates can vary dramatically. If you have a good credit score, you should be eligible for some of the lowest interest rates.
Should You Get a Personal Loan?
Personal loans are a good way to cover unexpected expenses or help towards large purchases. They’re also an option if you need a way to consolidate credit card debt.
However, if you’re looking for a short-term loan, looking at credit cards with 0 percent introductory APR may make more sense. If you’re able to pay off the credit card before the introductory period is up, you’ll avoid paying interest.
Personal loans can be appealing if you have poor credit, but it’s important to look closely at the interest rate and be sure that you’ll be able to make the monthly repayments.
Why Get Educated About Personal Loans?
It’s all too easy to get excited about borrowing large sums of money, without really doing your research.
By understanding the pros and cons of personal loans, you’ll be able to make the right choice next time you need to borrow cash. If you’re able to confidently answer the question, ‘What is a personal loan?’, you’re ready to make an informed decision.