Personal loans can be quite helpful to get you enough money to cover a specific expense. You can use them to consolidate your debt, make home improvements, pay unexpected costs, and much more. They are appealing to consumers for many reasons. Usually, these loans have low interest rates (if you have good credit), and they come in smaller loan amounts. Therefore, you don’t get more money than you need, which could end up costing you thousands more.
While these loans have a variety of benefits, they aren’t for everyone. As such, it’s important to know a few bits of information before making your final decision.
How They Work
These loans are called installment loans, which means you borrow a specific amount of money and pay it back to the lender with interest using monthly payments throughout the lifetime of the loan. In most cases, they are between 12 and 48 months in length. When it’s paid off fully, the account is closed. At that time, if you need more money, you can apply for a new loan.
Types of Personal Loans
You’ll find two personal loans available, including unsecured and secured. An unsecured loan isn’t backed by any collateral. The lender can decide if you qualify based on credit scores and financial history. If you’re not eligible at all or want a low interest rate, a secured loan might be best for you. With these, collateral is involved, such as a CD or savings account. That way, if you can’t make a payment, the lender can rightfully claim that asset as a way to fulfill the loan payoff.
Where You Get Them
A bank is a good place to start looking when you need a loan. However, these financial institutions are likely to have many hoops to jump through. If you have already applied and been turned down at a bank, you might also try a credit union, online lenders, and consumer finance companies.
Many online lenders have popped up in recent years, so it is important to make sure they are legitimate. You can always check the BBB or the Consumer Financial Protection Bureau.
A personal loan can give you the cash you require for whatever situation you find yourself in. However, these loans aren’t always the best option. People with good credit might consider getting a new credit card with a 0% introductory transfer rate. You can move all of your current debt to that card, and pay it off without incurring interest. This option might not be suitable if you have a lot of debt. For one, you might not have a high enough credit limit to transfer all outstanding financial obligations to that card. Along with such, you’ll rack up thousands of dollars for interest charges if you don’t pay it off within the introductory period.
Homeowners can dip into their home equity line of credit. It might be called a HELOC or HEL. You can get financing for your needs, get higher loan amounts, and better rates. Therefore, it’s essential to be aware that your house is the collateral for these types of loans. Defaulting on such a line of credit ensures that the lender can take possession of your home or foreclose on it.
Of course, applying for any loan means a credit check, which is now automatically part of the application process. It’s called a hard inquiry and can lower your score a little.
Interest rates on personal loans can be anywhere from five to 36 percent, depending on many factors. You might also have to pay origination fees. Amazingly, some lenders might charge you to pay off your loan early, so be wary of that, as well. In short, such a loan can be beneficial, but you must still research your options to get the best rates.