Thinking about tackling a new home improvement project, consolidating credit card debt or looking for ways to pay for an unexpected medical expense? You’re not alone — many people need to borrow money at some point in their lives. While there are many different reasons for considering a personal loan, one thing many people have in common is wanting to hear, “Congratulations, your loan has been approved.”
Commonly Asked Questions about Personal Loans
What is a Personal Loan?
A personal loan is money you borrow and pay back in fixed monthly payments — or installments — over some time. A personal loan can be used for just about anything like paying off credit card debt, investing in home improvements, paying for a wedding or taking that dream vacation.
What’s the Difference Between a Secured and Unsecured Loan?
The biggest difference between a secured and unsecured personal loan is that a secured loan requires collateral to back the loan. Collateral is an asset you own, like a car, that you agree to surrender to the lender in the event you default on your loan. Since secured loans allow lenders to seize the asset you use to back the loan, interest rates tend to be lower.
How Do Personal Loans Work?
Most personal loans offer fixed interest rates and payments that allow you to repay the loan over a set period. Unlike a credit card — which is an open line of credit and doesn’t offer a scheduled pay-off term — a personal loan gives you an exact timeframe to pay off what you borrow without an open line of credit. This means you won’t gain access to more funds as you make payments — giving you a light at the end of the tunnel to paying off the loan.
What Are the Benefits of Obtaining a Personal Loan?
Many benefits come with a personal loan. If managed responsibly, a personal loan could:
- Provide stability
A personal loan can provide stability with a fixed interest rate and loan term. Your monthly payments and payoff timeline will be predictable. Additionally, an unsecured personal loan allows you to borrow money without having to back the loan with an important asset, such as your home or car—two very important things that add stability to your life.
- Simplify your financial situation
Having fixed payments on your loan could help simplify your financial situation by making it easier to stick to a monthly budget—especially if you have multiple payments to make each month.
- Save you time
If you’re feeling overwhelmed by having to make several payments on outstanding credit card balances each month, a personal debt consolidation loan could help save you time. Trying to keep up with multiple monthly payments can be frustrating. By consolidating multiple credit card debts with a personal loan — you could potentially save time by only having one monthly payment to keep track of.
- Save you money
A low-interest rate personal loan could help you save money and get out of debt faster if you use it to consolidate high-interest rate credit cards. With most personal loans, the interest rate and repayment terms are fixed, so you won’t have to worry about the interest rate changing or gaining access to add more debt on the loan.
- Add financial value
You may find this hard to believe, but a personal loan can add financial value to your life. For example, let’s say you’ve always wanted to build an addition on your home but don’t have the cash on hand to pay for it. A low-interest rate personal loan could help you get the funds you need quickly. Making improvements around your house not only provides a better home for you and your family – it may also increase your home’s value.
- Relieve stress
At one point or another, we all face unexpected events in life that can cause stress and financial strain. When your car suddenly breaks down, the water heater decides to call it quits or a sizable medical expense pops up — a personal loan could be there for you to put your mind at ease.
- Help you build or improve your credit score
When managed responsibly a personal loan may improve your credit score by adding to your credit mix and improving your payment history. Since 10 percent of your credit score is based on the different types of credit you have — also known as “credit mix” — establishing a history of making timely payments on installment loans, credit cards, and a mortgage could positively impact your credit score and help you build credit.
How to Get Approved for a Personal Loan
Whether you want to start your own business, invest in a home improvement project or consolidate credit card debt, getting approved for a personal loan may not be as hard as you think. Understanding the criteria for qualifying for a personal loan will help you prepare for the application process—increasing your chances of getting approved for the loan.
When Applying for a Personal Loan the Following Requirements Are Typically Required:
A credit score above 640
Good credit is one of the ways to help secure a personal loan. Those who have a credit score of at least 640 generally fall within the “good score” crowd. If your score is lower than a 640, options may still be available.
A low debt-to-income ratio
If your income exceeds your debt, you may be in luck. The lower your debt-to-income ratio, the better the chance you have to secure a personal loan.
A means for repayment
Applicants who get approved for a personal loan often generate enough income to repay their loan.