It’s possible you’ve considered a personal loan, but never moved forward because you have so many questions. We intend to cover all the basic ins and outs of applying for and using personal loans and what to be on the lookout for will set you on the path to success.
How A Personal Loan Works
In basic terms, a personal loan is when you borrow a set sum from a bank or loan provider, for a set amount of time with an agreed upon payback schedule. They also often entail some sort of interest or fee. The loan can be for an amount that is on the smaller side like $5,000, or can go up to over hundreds of thousands of dollars. And the payback period might be quick, say pay back in one year, or could go for upwards of 15 years . Understanding these parameters up front will help you determine the best loan option for you.
It’s also important to understand that a personal loan is unsecured debt, meaning it is not insurance secured like a home loan or car loan might be. Because of this, personal loans can have higher interest rates or annual fees than other, secured loans. Something to keep in mind.
How To Pick The Best Loan
Picking the right loan is going to go a long way toward setting you up for success in the loan process. One of the best ways to land on the right one is to shop around. You don’t want to just accept the first offer you find. Price compare to ensure you end up with something you are comfortable with, and something that you can pay back in the agreed upon time. You also want to make sure and read any documents you’re given, especially items you need to sign, so that you can understand all of the fine print. You don’t want to sign and agree to something you don’t fully understand. And finally, take a moment to go online and read reviews of any lenders you are considering, to get a better idea of the experiences others have had with that particular provider.
The Pros And Cons
There are plenty of good reasons to apply for a personal loan, but there are also some things that could make the process go sour. On the plus side, you often get near immediate access to the money, which can be a great relief when you really need it. The interest rates are often lower than those on a credit card, so it can make sense to take out a loan for some reasons rather than put things on credit. And the interest rates are often fixed, so you typically don’t have to worry about your payment suddenly going up.
On the down side, however, interest rates on personal loans are often higher than other types of loans, and if you’re not careful the interest you will pay can really dig you in deep. And if you struggle to pay back the loan on the agreed upon schedule, it could have a negative impact on your credit score, leading to long term financial difficulty.
What A Personal Loan Is Used For
There are a multitude of reasons someone might take out a personal loan, but we will cover some of the most common. Credit card refinancing is high on the list, which is when you take out a loan to pay off your credit card debt in one fell swoop. It can make sense when the credit card interest is higher than the loan interest. Debt consolidation is another one of the most common, which is when you take all of your debt and put it together in an aim to pay it off in a lump. Home renovations also rank high on the list, as many homeowners feel investing in their home will earn them their money back and then some. Some of the other, smaller reasons are a business loan, car financing, and loans for other large purchases .
Avoid Getting Taken In
While there are many reputable personal loan providers out there, it is possible to get taken in by a scam, so it is important to look out for some key warning signs. Look for certain key words that will tip you off that something is too good to be true. Being asked to pay fees up front, sometimes called insurance, can mean a company is fraudulent. Also, be wary of agencies that offer a no credit check guarantee—credit checks are an expected part of the loan process, even with companies that work specifically with clients that have lower credit scores . Also, if a firm has precalculated interest rates, it is likely not on the up and up. And finally look out for penalties for paying off your loan early. Paying early should be seen as a bonus, not something you will get fined for.
Hopefully we’ve covered some of your major questions, and removed much of the mystery surrounding personal loans. While it can be a big decision to move forward, it’s not something you need to be afraid of. Understanding the process and getting your ducks in a row are all part of the process in successfully applying for and using a personal loan. Understand your interest rates and payback plan, and look out for any scammers that might be trying to take advantage. By going into the process equipped with the knowledge you need, you can feel confident that your personal loan process will be a success, no matter what you are looking to put that money toward.