If you’re interested in learning just about everything you need to know about personal loans, you’ve come to the right place. So, without any further ado – let’s jump into it.
What is a Personal Loan?
A personal loan is a sum of money you borrow from a lender and pay back in fixed monthly payments over a given period of time. The loan can be used for consolidating credit card debt, making improvements to your home, paying for medical expenses, or just about anything else you can think of.
How Personal Loans Work
As we mentioned, most personal loans come with fixed interest rates and payments that allow you to repay your loan over a set period. Unlike credit cards, which don’t offer a scheduled payoff term, a personal loan gives you an exact timeframe to pay off what you borrow. While you won’t gain access to more money by making payments (like you do with credit cards), you’ll know the exact date your loan will be paid off and can plan for it accordingly.
The Difference Between Secured and Unsecured Loans
- Not protected by collateral
- If you default, credit score may be negatively impacted
- Typically higher interest rates
- Connected to collateral
- If you default, credit score may be negatively impacted, and collateral could be seized
- Typically lower interest rates
If you’re confused by any of the information listed above, the context you’ll find below should help clear things up.
Collateral: A valuable piece of property you own that you agree to forfeit to lenders if you default on your loan, usually a house or car.
Defaulting: What happens when you fail to make loan payments according to the terms of your loan. Regardless of whether you have a secured or unsecured loan, creditors will report your delinquencies to the credit bureaus and your credit score could be negatively impacted because of it. The main difference of defaulting on a secured loan is that creditors could seize the property you agreed to forfeit when you accepted the loan.
Differences in interest rates: Secured loans generally have lower interest rates because it’s protected by collateral; you can borrow money at a lower rate because if you default on the loan, some of their losses can be recouped by the sale of your house or car. Unsecured loans have no such protection, which is why they typically come with higher interest rates.
The Benefits of a Personal Loan
When managed responsibly, a personal loan could:
Simplify your financial situation – Keeping track of multiple payments can be tricky, especially when life gets stressful. If you qualify for a large enough personal loan to cover all of your existing debt, those monthly payments could be condensed into one manageable monthly payment.
Save you money – Using a low-interest personal loan to consolidate high-interest credit card debt can get you out of debt faster and save you money on expensive interest payments.
Add financial value – Using a personal loan to make improvements to your home can increase your property’s value, adding financial value to your life. You can also use personal loans to purchase assets that will increase in value over time, which could boost your net worth as a result.
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 calls it quits, or a sizeable medical expense pops up, a personal loan could help to make a stressful situation more manageable.
Help build or improve your credit score – Managing a personal loan sensibly could improve your credit score by adding to your credit mix and improving your payment history. If you’re interested in learning more about credit and how you can improve yours, check out our article “6 Tips for Building Credit”.
What a Personal Loan Could Cost
Where you apply for a personal loan determines what you’ll have to pay to borrow the money. While the rates you receive greatly depend on the lender you apply with and the state of your credit, you can generally expect the interest rates of your personal loan to be anywhere from 5.99% to 35.99%.
As you may already know, the higher your credit score is, the more likely you are to be approved for low-interest loans and lines of credit. Because interest rates on personal loans are usually fixed for the life of the loan, you’ll want to make sure your credit is in tip-top shape before applying so you can save as much money as possible on interest payments.
Rather than pursuing the first option that seems decent, consider shopping around and comparing the rates of loans you want to apply for to get the best deal – a small difference in APRs may seem insignificant at first glance, but that difference could save or cost you a small sum of money over the lifetime of a loan.
How Much Can You Borrow with a Personal Loan?
This depends on the lender you talk to, but you can generally expect to be able to borrow anywhere from $2,000 to $35,000 when you take out a personal loan. If you have an excellent credit history and high income, some lenders may even pre-approve you for an incredible loan of up to $50,000. While it’d probably be a nice feeling to wake up with that much money in the bank, here’s a word of advice:
Borrow only what you need to pay for the things that will help you achieve progress.
Whether that progress is personal, financial, or both doesn’t matter; as long as you’re using the funds to build a better life for yourself, that’s what’s important. Although it can be tempting to borrow more than you need so you can have a little extra spending money on the side, keep in mind that you’ll be responsible for paying back everything you borrow – with a potentially healthy amount of interest on top.
How to Get Approved for a Personal Loan
While requirements vary between lenders, understanding the criteria involved in qualifying for a personal loan will help you prepare for the application process and increase your chances of getting approved for a loan. If you’ve got both of the following criteria covered, you could be in a good position to get approved for a personal loan.
A credit score above 640
Decent credit is crucial to securing a personal loan with competitive interest rates. If your credit score is 640 or closely hovering in that area, many lenders would group you in with the “fair score” crowd, which is typically good enough to get you approved for a personal loan. While there are still options available for you if your credit score is below 640, the loans you could be approved for will generally have higher interest rates.
A low debt-to-income ratio
If your income exceeds your debt, you’re making smart money decisions and are in a good financial place. The lower your debt-to-income ratio is, the better chance you’ll have at securing a personal loan. To learn more about debt-to-income ratios and how to calculate your own, take a look at our article “What is Debt-to-Income Ratio?”
How Long Does It Take to Get Approved?
Applying for a personal loan online only takes around 5 minutes, and depending on your lender, your loan may be processed in one to three days. If you’re approved, your money could be in your account in as little as one business day, and once it’s in there, the money is yours to consolidate debt, pay down high-interest rate credit cards, take on a home improvement project, or do nearly anything else you can put your mind to.