What Is a Personal Loan?
A loan is a fixed-rate loan paid monthly for a set term period, usually between one and five years. Personal loans are often referred to as unsecured loans as there are typically no assets (collateral) needed to secure the loan.
Collateral is a type of asset that can be taken and sold in order to repay a loan. For example, a home being funded serves as collateral for the loan.
Personal loans are typically approved by lenders based on the borrower’s creditworthiness.
When compared to home and car loans, personal loans are fairly simple to apply for. As a result, borrowers use personal loans for a range of things – including large purchases and home repairs.
You can spend the money on almost anything you want, but it’s best to borrow only what you need or items that will have a huge effect on your life.
A secured loan is a loan that is backed by collateral, usually something you own like a home or a car.
If you default on your loan payments, the lender may seize your property (the collateral) to help cover the outstanding loan.
Home equity line of credit
Home equity loans
Secured Loans Examples
An unsecured loan is a loan that does not require any collateral.
If you default on this type of loan, the lender won’t have any assets to take ownership of, and can only freeze your loan account.
The lender may also try and collect the outstanding debt by using a debt collection service.
Defaulting on a loan can damage your credit report and may also prevent you from obtaining credit or a mortgage in future.
When a lender assesses your loan application for an unsecured loan they usually consider your debt-to-income ratio, credit history, and assets.
Because of the increased risk to the lender, an unsecured loan typically has a higher interest rate.
Personal lines of credit
Unsecured Loan Examples
How Personal Loans Work
When taking out a personal loan, the money is usually given to you in one sum. You then repay the loan back on a monthly basis with fixed payments.
Keep in mind that loan requirements can vary between lenders and there are various factors to consider when applying for loans online.
The interest rate on your loan is determined by your credit score. The better your credit score, the better the interest rates you may qualify for.
The interest rates on personal loans are usually fixed. Because your interest rate does not change, your monthly payments will stay the same until the loan is paid off.
Lenders may offer you variable interest rates, but this is a less common alternative. With a variable rate, you may pay less or more, as it depends on how interest rates rise or fall during the duration of your repayment term.
Warning: If you have a bad credit history, your repayment rates may be higher – closer to interest rates on credit cards. You may also need a co-signer that is creditworthy for the loan.
Generally, the interest rate on a secured loan is lower than an unsecured loan, because the risk is lower. In fact, you may even be able to negotiate a lower interest rate on a secured loan.
Personal loans are typically repaid over one to five years, although your specific loan terms can vary. Personal loans, as opposed to credit cards, will minimize the amount of interest you pay and have a set repayment date.
Most personal loans don’t have a penalty for early repayment, so if you can settle your loan earlier, you can do this to save money.
For personal loans, some lenders charge origination fees, while others include all expenses in the interest rate. When you pay origination fees, the lender takes a one-time payment depending on the amount of money you borrow.
The origination fee usually ranges from 1-8% of the loan amount and is determined by your credit score.
How to Get Approved for a Personal Loan
Lenders will have different requirements and evaluate your application based on creditworthiness. Here are the factors they consider:
Lenders also review your credit history or obtain a credit score to determine how you’ve treated credit in the past.
Your credit reports provide information about past loans, late payments, and public documents that lenders might be interested in knowing about.
Note: Alternative credit scoring tools can also be used by lenders. They may, for example, look at your history of on-time rent and utility payments to predict how you’ll repay a loan.
Lenders must check that you have sufficient income to repay the loan. They can inquire about your jobs and income. They can also examine your existing debt to ensure that adding a loan payment would not absorb too much of your monthly income.
Types of Personal Loans
If you decide to try a personal loan, there are several sources to borrow from.
Standard Personal Loans
Personal loans have long been available from banks and credit unions. You can also apply in person or online and get funds deposited into your checking account within a few days.
Loans from investors and financial institutions are made available via peer-to-peer (P2P) platforms and other online lenders.
These programs are the most likely to employ alternative credit scoring models, and the application process is often straightforward.
Because of the competitiveness in the current lending marketplace, lenders are offering hyper-competitive rates for loans online.
Traditional lenders, such as loans from banks or credit unions, are no longer always the cheapest place to get a loan.
Here is a comparison of some of the most popular online loans:
|Company||Overall Rating||Times Chosen|
|Blue Trust Loans||13,388||View Company|
|Cash Advance||111||View Company|
|Check Into Cash||11,891||View Company|
|Credit Karma||0||View Company|
|Jora Credit||6,116||View Company|
|Main Street Finance Group||0||View Company|
Some lenders have direct relationships with service providers. They may help pay for dental work, fertility medication, or landscaping projects.
Borrowing is easy, so it’s a good idea to shop around and compare prices.
Note: Credit cards are essentially personal loans as well. They are, however, revolving loans that operate differently from what most lenders refer to as a personal loan.
Other Loan Types
Why Get A Personal Loan
There are many reasons you might consider finding a personal loan online, such as making a large purchase, consolidating debt, or needing quick cash for a financial emergency.
Small home improvements
Investing in yourself
What you can spend a personal loan on:
Ideally, you should have emergency funds set aside for life’s unexpected events. However, there are periods when borrowing is the only choice. If you have large medical bills or another emergency, a personal loan might be a good option.
Small Home Improvements
Because you’re reinvesting in your house, it’s normal to use home equity loans for home improvement projects. However, if you do not need a large sum, a personal loan for home improvements can be less costly and easier to obtain.
When you need to buy something large or costly but don’t have the cash, a personal loan will be able to help.
If you owe money on credit cards with high interest rates, you can repay those debts with a lower-interest personal loan. Because less of each monthly payment goes toward interest rates, you can pay off debt faster.
Investing in Yourself
Personal loans can be able to provide financing while starting a company or learning new skills for your job. However, some lenders place restrictions on how you can use loan proceeds.
Some personal loans, for example, do not allow you to use them to pay for higher education expenses.
Different Ways to Borrow Money
Here are some alternative ways to borrow money:
Line of Credit (LOC)
A line of credit works in a similar way as a credit card.
You are given a maximum credit limit and you are allowed to borrow up to that limit. However, unlike a credit card, there are different phases with a line of credit.
The draw phase is the first phase and this refers to when you can use the available funds in your line of credit.
After this follows the payment phase where you need to start repaying the funds you’ve used.
In-between these phases there may also be an interest-only phase, whereby you need to repay the interest on the amount you’ve used.
Depending on how your LOC is set up, you may be able to also write checks and in some cases, it may be linked to your debit card.
A line of credit can be unsecured or secured.
Conventional loans are also referred to as personal loans.
These loans are typically used for bigger purchases, such as a car or a house. This could also include a home equity loan.
The repayment terms and amortization for a conventional loan are determined upfront, so borrowers know exactly what they’ll have to pay, and for how long.
A conventional loan may be secured or unsecured.
Payday loans or cash advances are a quick solution to a financial emergency.
Payday loans online are secured against your next paycheck so this is why it should only be used as a short-term solution.
Interim or Bridge Loan
A bridge loan, also known as an interim loan, is usually a short-term loan with a single payment.
Borrowers usually repay a bridge loan with one payment, instead of installments.
An interim or bridge loan may also be used for a real estate purchase.
How To Get the Best Online Loans
Getting a loan is easy. Lenders tend to judge your creditworthiness based on your credit score and your income to debt ratio.
Knowing those before applying for a loan will help you find the right lender.
Compare loan rates
Shopping around to find the right loan rate will ensure you are not paying more than you need to in interest and fees.
Every time you apply for loans online, the lender will run a hard credit check. This will slightly drop your credit score for a little while. That is why we recommend shopping around before applying for loans. That way, you don’t get multiple hard credit checks in a short period of time, dropping your credit rating.
Know your credit score
You can get a copy of your credit score for free once a year at www.ftc.gov. If you have low credit work on building up your credit score before applying.
Review your credit report from the three major reporting agencies: TransUnion, Experian, and Equifax.
This is a good opportunity to resolve any issues or inaccuracies on your credit report. Keep in mind that many lenders require a minimum credit score to approve a loan, so knowing your score is important. If you don’t meet that minimum, there is no reason for you to apply.
Draw up a budget
It’s essential to know how much extra cash you have to repay the loan regularly. Loan terms are usually over a few years, so make sure that you can cover the payments throughout that period.