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Personal Loans Online
Feeling crippled by unexpected expenses, or short on cash for accomplishing a goal? Whether you’re looking to pay for your wedding, renovate your kitchen or chip off student debt at a lower rate of interest, a personal loan could give you the financial flexibility you seek.
Keep reading for a deep dive into the world of personal loans, including a complete understanding of what they are, how they work, and how you can make the most of them to suit your unique circumstances.
What is a Personal Loan?
A personal loan is a financial product that allows individuals to borrow a fixed sum of money from a lender such as a bank, credit union, or online lending platform. Unlike loans intended for a specific purpose such as auto or home loans, personal loans are versatile and can be used for any purpose you see fit. Some examples could include consolidating your debts, covering medical expenses, financing a wedding, or even taking a dream vacation.
Personal loans are typically unsecured, meaning they don’t require collateral such as property or other assets to back them up. Instead, the lender relies on your credit-worthiness as a guarantee that you’ll pay it back. As long as you can demonstrate that you meet their minimum borrowing requirements, all a lender needs to approve your loan is your signature. You could be receiving your funds in your bank account as soon as the next business day.
This lack of collateral requirement can broaden the accessibility of personal loans, making them an attractive option for a diverse range of borrowers.
How do Personal Loans Work?
Personal loans work by providing borrowers with a lump sum of money up front that is repaid in monthly installments over a predetermined period of time. Personal loan terms can range in duration between one to seven years.
The interest rate on personal loans may range between 6% to 36%. It can be either fixed or variable, depending on the lender’s policies and the borrower’s creditworthiness.
Fixed interest rates remain constant throughout the loan term, offering predictability, stability and the benefit of knowing exactly what your payment will be from month to month. In contrast, variable interest rates may fluctuate based on market conditions. During your repayment period, interest will accrue on the outstanding balance, contributing to the overall cost of the loan.
How to Apply for a Personal Loan
Navigating the application process can feel intimidating if you’ve never had a personal loan before. Break it down into the following steps:
- Determine your needs. Start by assessing why you need the loan and how much money you need. Having a clear purpose and a specific loan amount in mind will help streamline the application process.
- Check your credit score. Review your credit score and credit report regularly. You can access free credit reports once per year from each of the major credit bureaus, including Equifax, Experian and TransUnion. Check for any errors on your reports that need correcting or areas you can work on to increase your score. A higher credit score increases your chances of qualifying for a personal loan with favorable terms, including a lower annual percentage rate (APR). This is the total cost of your loan, including rate of interest and additional fees.
- Shop around. Compare different lenders’ offerings, including rates of interest and repayment terms. Consider traditional financial institutions such as banks and credit unions, as well as online lenders known for offering convenience and quick approval processes. Look for lenders that conduct a pre-screening, or soft credit check, without impacting your credit score. If you run too many hard credit checks at once, it could cause your credit score to drop by a few points.
- Gather all your documentation. Lenders typically require documentation with your application, such as pay stubs, tax returns and proof of stable income, government-issued identification, and other financial documents. Make sure to gather all the necessary paperwork in advance to expedite your application.
- Submit your formal application. Complete the lender’s application process. This may involve providing personal information such as your name, address and income; the purpose of your loan; and the desired loan amount.
- Review your offers. After you submit your applications, you’ll receive loan offers from various lenders. Compare them carefully, paying attention to interest rates, any extra fees, and the duration of the repayment terms. Other features that may sway your decision include how quickly the lender can approve your loan, whether they offer flexible repayment options, and the level of ease in making online payments through features such as autopay or a mobile app.
- Choose your loan: Select the loan offer that best suits your needs and financial situation. Make sure to factor the monthly payments into your budget right away, and make a plan to pay them on time.
- Receive your funds: If approved, the lender will finalize the loan agreement, and the funds will be disbursed to your bank account.
Pros and Cons of Personal Loans
It’s important to consider the pros and cons when determining whether a personal loan is the right product for you. Consider the following advantages of this financial tool.
- Flexibility: Personal loans can be used for any purpose, giving borrowers the flexibility to manage their financial needs whether they’re immediate or farther into the future.
- Predictable payments: Fixed rate personal loans offer predictable monthly payments, making budgeting easier.
- No collateral: Most personal loans are unsecured, meaning you don’t have to risk losing assets like your home or car to borrow money.
- Quick access: Online lenders often provide fast approval and funding, allowing you to access funds within days.
- Debt consolidation: Personal loans can help consolidate multiple high-interest debts into a single, more manageable loan with a potentially lower interest rate.
On the other hand, personal loans can also come with some drawbacks. Some of these include:
- Higher interest rates: Personal loans often come with higher interest rates compared to secured loans that are backed by collateral assets. This is because the lender faces a higher risk. To compensate, they may charge more, especially if you have a less than perfect credit score, making this product a more expensive option for you.
- Credit score impact: When you apply for a personal loan, the lender typically performs a hard credit inquiry. This inquiry can temporarily lower your credit score, making it harder to obtain credit or loans in the near future. Once you do get a personal loan, if you find yourself unable to make your payments on time, your credit score can get further damaged.
- Debt accumulation: Taking out a personal loan adds to your overall debt load and increases your debt to income ratio. If you already owe large amounts of money, adding another loan can be risky and lead to a debt spiral if you’re unable to manage it properly.
- Temptation to overspend: The accessibility of personal loans can tempt individuals to borrow more than they need or to use the funds for non-essential purposes.
It’s crucial to weigh these drawbacks against the potential benefits of a personal loan and to carefully assess your financial situation and ability to repay before taking out such a loan. Borrowers should also compare loan offers, consider alternative financing options, and have a clear repayment plan in place to mitigate some of these disadvantages.
How to Decide if a Personal Loan is Right for You
Deciding if a personal loan is right for you involves careful consideration of your financial situation and goals. Here are some key factors to weigh:
Purpose: Clearly define why you need the loan and whether it’s really necessary. Personal loans are best for planned essential expenses like home improvement or debt consolidation, rather than frivolous spending such as going on a shopping spree.
Affordability: Assess whether you can comfortably afford the monthly payments on top of all your other expenses, while factoring in both the interest rate and associated fees.
Creditworthiness: A good credit score increases your chances of qualifying for a favorable loan. If your credit is less than stellar, work on improving it before applying.
Alternatives: Explore other financing options, such as credit cards, home equity loans, lines of credit, or even borrowing from a family member, to determine which avenue best suits your needs.
Loan terms: Understand the loan terms, including the interest rate, repayment period, and any fees. Ensure they align with the rest of your financial goals.
How to Choose the Best Personal Loan
Selecting the best personal loan requires careful research and consideration. Here are some steps to guide your decision:
- Compare rates. Compare interest rates from various lenders to find the most competitive offer. A lower rate can significantly reduce your borrowing costs.
- Check for fees. Assess whether there are any application fees, origination fees, or penalties for paying your loan off early. Determine whether those fees will reduce the overall amount of your loan or be added on top of the funds you borrow. Loans with minimal fees will cost you less in the long run.
- Review repayment terms. Understand the loan’s repayment period and monthly payment requirements. Choose terms that are most realistic for your budget and financial goals.
- Consider the lender. Research the lender’s reputation, level of customer service, and online reviews to ensure a positive borrowing experience. Keep in mind that some lenders specialize in borrowers with excellent credit, while others cater to those with fair or poor credit.
- Read the fine print. Carefully review the loan agreement, including terms and conditions. Ensure you understand all aspects of the loan before you sign off.
How to boost your chances of getting approved
While each lender has their own approval criteria, there are some key strategies you can follow to boost your chances of getting a personal loan.
Find a co-signer
If your credit score isn’t strong enough on its own or you’re just starting out and have a limited credit history, a co-signer with good credit can help you secure a personal loan. Their financial stability can reassure lenders and increase your chances of approval, but they’re also on the hook if you miss any payments. Make sure to pay on time to avoid hurting their credit — or your relationship.
Choose a secured loan
Consider a secured personal loan if you’re struggling to get approved for unsecured financing. These loans are backed by collateral like your home or your car, which reduces the lender’s risk. If you don’t repay the loan, you could lose your assets, so it’s essential that you make your monthly payments by every deadline.
Pay down other debts first
Lenders often consider your debt-to-income ratio (DTI) when assessing your loan application. This indicates how many debts you have compared to the money you make. A lower DTI, meaning you have less debt relative to your income, can boost your chances of approval. Paying down what you already owe or increasing your income can help improve your DTI. It also improves your overall credit score.
Are personal loans only for emergencies?
Personal loans can be used for various purposes, including emergencies, but they are not limited to this purpose. They can be used to fund planned expenses like home renovations, debt consolidation, or major purchases.
What is the difference between a secured and unsecured loan?
Secured personal loans require collateral, such as a home or car, to secure the loan and minimize the lender’s risk. Unsecured personal loans do not require collateral, but often come with higher interest rates.
Can I get a personal loan with bad credit?
While it may be more challenging to qualify for a personal loan with bad credit, some lenders specialize in offering loans to individuals with less than perfect credit scores. They may instead consider other criteria such as education or work history. However, these loans may come with higher interest rates and stricter terms.
How long does it take to get approved for a personal loan?
The approval process varies among lenders. Online lenders typically offer faster approval times, sometimes as quickly within one business day. Traditional banks may take longer, up to a week or more. It also depends on the completeness and accuracy of your application as well as the lender's review process.
Can I pay off a personal loan early?
Most personal loans allow early repayment. Some loans may have prepayment penalties, so it's essential to review your loan agreement to understand any associated fees.