Of all the financial products and tools out there, personal loans are one of the easiest to understand. When you take out a personal loan, you’re borrowing money for a fixed interest rate over a fixed period of time. Sounds easy, right? Generally speaking, it is.
Personal loan companies are getting better at simplifying their application process and making money more accessible – at record turn-around times – so you can achieve your goals and live your best life.
Here’s what you need to know 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 period of time. A personal loan can be used for just about anything -paying off credit card debt, investing in home improvements, paying for a wedding, or taking that dream vacation.
How 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.
Secured vs. Unsecured: What’s the Difference?
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.
The Benefits of 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, as 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. Consolidating multiple credit card debts with a personal loan could potentially save you time due to the fact that you only have 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, but it can also increase your home’s value.
- Relieve stress
At one point or another, we all face unexpected events in life that 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.
What a Personal Loan Could Cost
What you pay to borrow from a personal loan may differ based on where you apply. Some lenders may charge an origination fee, but the cost of that fee could outweigh the amount of money you could save in interest, which leads us to the next important cost to consider—the interest rate.
Depending on the lender, interest rates can start as low as 5.99% if you have great credit. Generally speaking, interest rates are fixed rates for the life of the loan which could be anywhere from three to five years.
How Much Can You Borrow with a Personal Loan?
With a personal loan, you can borrow anywhere from $2,000 to $35,000 depending on the lender. Some lenders may allow you to borrow as much as $50,000 if you’re extremely creditworthy. A word of advice: Borrow only what you need to pay for the things that are important in life.
The Many Uses of Personal Loans
A personal loan can help you get through the financial challenges we all face in life. They can be used to pay off high-interest rate credit card debt, take a dream vacation, make a much-needed repair on you home, and so much more. In addition, an unsecured personal loan doesn’t need to be backed by collateral unlike other financial products.
Personal loans are a great way to:
- Consolidate existing debt.
- Refinance your credit cards.
- Start or finish home improvement projects.
- Pay for a vacation or family trip.
- Fund an expensive relocation or move.
- Finance your dream wedding and pay for your ultimate honeymoon.
- Pay for unexpected medical and dental expenses.
- Support the costs associated with a new baby or adoption.
- Get the money you need for other major purchases, like office furniture for your new start-up business.
How to Apply and Get Approved for a Personal Loan
Whether you want to start your own business, invest in a home renovation, or consolidate credit card debt, getting approved for a personal loan may not be as hard as you think. In fact, with some lenders, the recommended steps are as easy as 1-2-3: Exploring your options, applying online, and getting approved.
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. While it varies by lender, here are some criteria that could help you get approved for a personal loan.
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.
How Long Does It Take to Get Approved?
Applying for a personal loan online could take as little as five minutes, and if you choose to borrow with a tech-savvy lender, your loan can be processed in as little as one to three days. If you’re approved, funds will be deposited directly to your bank account. After that, the money is all yours to consolidate debt, pay down high interest rate credit cards, take on a home improvement project, and much, much more.