Are you considering taking out a personal loan to help consolidate debt or pay off a large purchase? While personal loans can be a great way to get immediate funds, they’re not for everyone. Read this personal loan guide to learn more about these loans, their pros and cons, how to get one and whether it’s the right option for you.
What Are Personal Loans?
A personal loan consists of money borrowed from a financial institution (such as a bank or credit union). As the name suggests, you can use these loans to pay for any personal needs you have. This is different from loans designated for certain purposes (such as mortgages or automobile loans). Personal loans are commonly used to fund medical expenses, major purchases and debt.
Every personal loan comes with its own unique conditions, which include:
- The principal: This is the overall amount of money you’re borrowing. You’ll pay off a part of your principal every month.
- The interest rate: Most lending institutions will charge interest in exchange for letting you use their money.
- The loan term: The loan term refers to how long you have to pay off your loan. For instance, if your loan term is ten months, you’ll be expected to pay the lenders back through ten monthly payments.
Most personal loans are unsecured, which means you don’t have to offer collateral (such as your home or car) that will be taken if you miss your payments. Rather, the lender will examine your credit score and debt-to-income ratio to determine whether you’re trustworthy. While this process may seem simple enough, it has its downsides.
Pros and Cons of Personal Loans
If you need to make an upcoming payment, taking out a personal loan might seem like a no-brainer. But before you rush off to the bank, consider the pros and cons.
Here are the top advantages of personal loans:
- Flexibility: Personal loans can be used for whatever purposes you wish.
- Lower interest rates: In general, personal loans have lower interest rates than credit cards. They also tend to have higher borrowing limits.
- Simplicity: Making monthly, fixed payments is easier to manage than multiple credit cards with various interest rates.
Here are the main disadvantages of personal loans:
- High payments: While personal loans are generally easier to manage than credit cards, they require higher monthly payments.
- Fees and penalties: If you miss a personal loan payment, your bank may charge you a late fee. If this happens more than once, your credit score can be negatively impacted.
- Potential for bad terms: Personal loans favor those with good credit. If you have poor credit, you may be subjected to higher interest rates.
Are Personal Loans Right For Me?
Anyone that needs a quick, flexible influx of funds should consider a personal loan. If you have good credit and are confident that you can make your monthly payments with interest, then you’re an ideal candidate for this loan type.
On the flip side, if you have poor credit, you might not get the best personal loan conditions. Moreover, not paying off your loan can greatly affect your credit score (which impacts your chances of taking out loans in the future). You could still get a personal loan by adding a co-signer or offering collateral, but make sure you’re willing to take the risk.
How To Get a Personal Loan
Have you decided that you want to take out a personal loan? Here’s what to do next.
1) Make an Estimate
Before you start talking to lenders, try and estimate what your loan conditions will be. This will give you a better idea of what to expect and whether you can make your payments. To do this, consider the following:
- Your credit score
- The loan amount
- Your desired loan term
You can get an estimate online using a free personal loan calculator.
2) Shop Around
If you decide to move forward with a personal loan, you’ll need to find a lending institution. You can obtain a loan from the following sources:
- Credit unions
- Non-banking financing institutions
Many lenders perform a soft credit check to determine whether you qualify for a loan. This check does not affect your credit score and asks for information like your desired loan amount, loan purpose, income and debt. If you don’t qualify, you can rule out that lender immediately.
3) Submit an Application
If you find a lender that you like, the next step is to submit an application. The application may ask for proof of your identity, as well as details about your income. However, before you settle on a lender, carefully analyze the loan details. You should pay particular attention to the following:
- Interest rates
- Loan term
Don’t just pick the first loan offer you get. Comparing your options can help ensure that you receive the best possible loan conditions.