Personal Loans - A Comprehensive Guide
Personal loans are an excellent solution for those who are planning on: consolidating debt, making a large purchase, or even kickstarting a savings plan. Our guide will help you select the appropriate personal loan which can potentially save you thousands of dollars in interest charges and fees.
Our comprehensive loan guide will walk you through everything you need to know about obtaining personal loans. Your situation is unique, and you’ll want to find a loan that fits your needs perfectly. You can select and customize a personal loan to suit the repayment schedule and other terms that you need. After all, picking the right loan can potentially save you thousands of dollars in interest charges and fees.
The process is fast, secure, and there is no charge to find a lender. All credit types are welcome and the funds could be deposited directly into your bank account as soon as tomorrow.Get a Personal Loan
Personal Loans Overview
When you're finished reading our article, you'll be able to select the loan option that best suits your immediate needs. We’ll also give you the inside scoop on surefire techniques to help your chances of getting approved. Personal loans can be a wonderful alternative to help you cover unexpected expenses and big-ticket transactions. They have the potential to offer you a much better interest rate than other forms of credit. Personal loans can be a better choice than financing with credit cards, particularly for people with above-average credit.
If your credit is subpar, this could still be the perfect solution for you. In fact, even if you've been turned down for other forms of credit, a personal loan could still be well within your reach. Credit cards can be great for small, regular purchases. Especially if you're paying your balance off each month. On the other hand, personal loans are better for larger one-time purchases. They aren't a form of revolving credit like credit cards. Once the loan has been repaid, you can't take out more money without applying for a new loan.
This can be good for anyone who struggles with managing their money and finds themselves racking up credit card debt repeatedly. Getting a loan doesn't have to be a long and formal process either. There's no need to put on a suit and get interrogated by a loans officer at your local bank. Nowadays you can get a personal loan within minutes over the Internet.
You could get a personal loan to:
- Pay off a credit card
- Invest in a business
- Consolidate high-interest debt
- Pay for your wedding or honeymoon
- Complete home improvements
- Pay for funeral expenses
- Take a vacation
- Put a down payment on a house
- Pay a security deposit
- Buy a car
- Cover medical bills
As of July 2017, the Federal Reserve Bank estimated the value of all consumer loans in the United States to be $1.380 trillion. Which is only a fraction of lending worldwide. In fact, the worldwide amount of consumer lending at the beginning of 2016 was $42.3 trillion! Why are the numbers so huge? Well, loans don't just need to be for emergencies and bad situations. Personal loans can come in handy for all sorts of situations, such as the ones listed above.
It's easy and convenient to find a personal loan. But that also means it's easier to fall into potential pitfalls if you jump in too quickly. Finding the right loan can still be a challenge. Even though getting the loan itself only takes a few minutes once you've decided on one. And it's really important that you take the time to find the right one. Because the difference for you might be thousands of dollars in interest.
The history of personal loans dates back to more than 2,000 years ago. Merchants of the world were the first to offer services similar to banks. In ancient Assyria and Sumeria, these merchants made grain loans to farmers. Farmers then paid them back in grains after their harvest. By the time of ancient Greece, lenders had started offering loans in temples. Along with other services like changing money and accepting deposits. There's even lots of mention of lending in the Bible!
Money lending is a very old practice, but like most things, it has evolved significantly over time. Nowadays, pretty much every bank offers personal loans. Along with a variety of other lenders.
But what exactly is a personal loan?
A way of covering large costs now, and paying them back over time
Personal loans are money that you borrow from a bank, credit union, or online lender.
Most personal loans are a form of unsecured debt. Although there are some secured loans, as well. We'll talk some more about exactly what that means in a bit.
Usually, personal loans get paid back in fixed monthly payments. This makes them installment loans, as opposed to credit cards which are considered revolving loans.
"Personal loan" often gets used as a catch-all term to include a wide range of credit products. It tends to include any loan for personal use.
Other people use it in the context of a general loan that you're free to spend on whatever you want.
Since it's such a broad term, it can be difficult to tell what a lender means by "personal loan" at first glance.
Some may use the term personal loan but then have restrictions on what you can use it for, such as a car loan. Others give you the freedom to use the money for whatever you'd like.
Here are some examples of things you can generally use a personal loan for:
Consolidating credit card debt
Paying for home repairs
But why would you want to take out a personal loan as opposed to any other kind of loan?
In the next section, we'll go over the advantages of personal loans. As well as how they compare to your other credit options.
But first, let's briefly talk about how your credit score will determine which personal loan is best for you.
Most types of loans will take your credit score and history into account
There are some types of loans where lenders won't look at your credit report. Some lenders may instead choose to look at proof of income like pay stubs. Others will offer you a secured loan, where you're borrowing money against the value of an asset like your home or car.
To get most loans, however, lenders will do a "hard credit pull" where they look at your credit report. They will examine your report for things like missed or late payments, as well as positive history of payments made on time.
They will also look at your overall credit score. The most popular and commonly used credit score is determined using the FICO (Fair Isaac Corporation) model.
Your credit score can range from 300–850.
Different lenders and credit agencies may have slightly different ranges that they use. But here is a good general overview of how credit scores are categorized:
- 800–850 – Exceptional
- 740–799 – Very Good
- 670–739 – Good
- 580–669 – Fair
- 300–579 – Poor
When checking out your loan options, it helps to know what your score is and what range you fall into. For example, the majority of the population falls under Good credit, as the average American FICO score is 695. If you're in this range, you'll qualify for the majority of loans.
But, if you have a score of about 740, you may have access to even better loans with lower rates, and more attractive terms. And if you have below-average credit, you might get more attractive offers by pursuing bad credit loans that are targeted specifically at borrowers like you.
You're probably aware of the three, but there are actually four main credit bureaus that create credit reports: Experian, Equifax, TransUnion and Innovis.
It's the least known of the four bureaus, but Innovis should also be on your radar, because many lenders still report your credit history to it. But note that Innovis only provides a credit report, not a credit score.
You can request a free copy of your report from all 4 bureaus every 12 months. However, for Innovis, you will need to request it directly through innovis.com; you cannot access it through annualcreditreport.com like the way you can with the other three.
Your credit score is based off things like:
- How long you've had credit for.
- Your payment history.
- How much debt you currently have.
- Recent hard inquiries on your credit report.
- Your credit limits and how much of them you're currently using.
- The types of credit you currently have (student loans, credit cards, etc.)
Your credit score will never factor in personal information like your gender, race, marital status, religion, or national origin.
If you think you might have a less-than-perfect credit score, there are things you can start doing to improve your credit score right away.
One of the most important things you can do is to check your own credit report regularly.
All Americans are entitled to a free copy of their credit report once a year by law. Your bank might even be able to provide you with free copies more frequently than that.
You should make sure that your credit report is free of any obvious errors or omissions. That includes things like making sure your name, address, and personal information is correct. As well as verifying details about your current debt are accurate.
Most importantly, look for incorrect missed or late payments listed. These can often have the biggest negative impact on your credit score. If you find incorrect information on your credit report, you can dispute it with any of the three main credit bureaus to have the information corrected.
It's hard to say for sure, but it's estimated that at least 10% of all credit reports have some kind of mistake on them. So it's worth taking the time to review your own report before applying for a loan, especially a big one. It might be the difference between being approved or rejected.
What Are The Advantages of Personal Loans and How Do They Compare to Other Loans?
So we know that a personal loan is money that you borrow from a lender and pay back in regular payments over time. Usually in monthly installments that include interest.
There are other popular alternatives like credit cards and personal lines of credit though.
So why get a personal loan over these other types of loans?
Here are some of the advantages:
Lower rates. Personal loans typically have lower rates than other types of loans.
That means you pay less interest than on other types of debt. For example, you might pay a 5% interest rate for a personal loan. But if you had put the expense on your credit card, you might end up with a 26% interest rate on the same purchase.
Fixed rate. This means the rate of your loan will stay the same as when you borrowed the money and won't fluctuate month-to-month.
Most personal loans offer fixed rates, and can be a great way to "lock in" your borrowing at a specific, unchanging rate.
Some personal loans can have variable rates though, so it's important to double-check what you're signing up for.
With a fixed rate loan, you don't need to worry about interest rates increasing or payments ballooning out of control. This can help you to manage your finances and budget better.
Rates vary based on the lender, loan amount, term length, your credit history and credit scores, and other personal information.
In contrast, the interest rate on most (but not all) credit cards and lines of credit are variable.
That means the amount of interest you owe is constantly changing with the Prime Rate and other economic factors.
Fixed terms. The terms on which you borrowed your money won't fluctuate.
If you pay the same amount every month, you know exactly when your debt will be fully paid off.
Terms for personal loans are usually shorter too. 36 or 60 months is the norm. So you won't be stuck with debt indefinitely.
Which is something you can run into if you just pay the minimum on your credit card every month.
No revolving credit. Revolving credit is a form of loan that lets you repeatedly access funds, up to an approved credit limit.
When you use part of your revolving credit line, you reduce your available credit and increase the minimum payment required.
But if you keep only paying the minimum amount and using more and more credit, it can take a very long time to pay off the debt.
Maybe you're one of those spenders who can't trust yourself with a credit card. A personal loan can be an awesome way to gain access to much-needed funds while creating a barrier between you and your wild spending.
As good as cash. Credit cards still aren't accepted everywhere. For example, contractors and other independent businesses might not accept credit cards. So it can be useful to be able to use cash or your bank card with the money from your personal loan.
Applying is easy. Most online lenders can use a short application to see if you'll get approved.
They use a "soft pull" which doesn't affect your credit score. You'll get a good idea of your interest rate and the amount you can borrow before they do a "hard pull" and affect your credit.
That makes shopping around for the best deal really convenient too. Always confirm it's a soft pull before you submit your information.
Don't assume the lender will only do a soft pull, because some might not. You don't want your credit affected just by exploring your loan options.
Helps your credit. Personal loans can help boost your FICO score. Especially if you're using one to pay off existing credit card debt.
You can reduce your credit utilization ratio which plays a factor in your credit score (more about that later.)
Plus, having multiple different types of credit impacts your overall credit score by as much as 10%.
You also don't need to have a perfect credit score. Personal loan companies are often more willing to accept people with lower credit scores than credit card companies.
Prepay flexibility. You can prepay or completely pay off your personal loan at any time without a penalty, in most cases.
If you end up with a lot of extra money for whatever reason, you can pay off your loan all at once.
Some loans have prepayment penalties for paying early though. So it's important to watch out for that, or paying early might actually hurt instead of help!
See what differentiates a personal loan from a credit card or line of credit
Most people turn to credit cards and personal lines of credit when they're looking for funds.
Here is how personal loans stack up compared to those alternatives.
Personal loans vs. credit cards
Definite repayment. Personal loans provide a definite repayment amount and period.
It can be hard to determine how much you're going to owe each month with your credit card.
Lower interest. Personal loans usually offer lower interest amounts.
Credit card loans can be in the double digits. While rates can vary, the average APR (annual percentage rate) for a credit card is 15%.
Personal loan rates can vary too, anywhere from 3% to 35%. But the average is closer to 10%.
That means that on a $20,000 loan, you can expect to pay an extra $1,000 in interest just by choosing a credit card over a personal loan.
Different terms. Borrowing terms are different for each option.
You can't re-borrow more money on a personal loan without completing an additional loan form.
With a credit card, you can keep borrowing and spending. This can be convenient if you're disciplined about your finances. But if you're not, you can keep borrowing, and your spending can spiral out of control before you realize.
Credit cards offer you more flexible spending and repayments. But interest can also build up if you're constantly spending more than you're paying off.
Personal loans vs. personal lines of credit
A personal line of credit is a loan that you can use like a credit card. Your lender approves the entire amount at once. But you will only pay interest on the amount that you actually use.
A personal line of credit can be good if you need to borrow money incrementally. For example, an ongoing home improvement project. Or if you need to pay off a contractor month by month.
Lines of credit are closer to credit cards than personal loans in many ways. A line of credit provides revolving debt just like a credit card does.
This makes it easy to overspend for the same reason that people can have problems with credit cards.
The average rate for a line of credit is between 7.25%–20%. Many personal lines of credit also have annual fees. So they can be more expensive than loans, if you need to use the full amount up front.
As you can see, there's a lot of reasons why personal loans can be a better choice for you than these other types of loans.
Now, it's time to talk about situations when a personal loan might be right for you.
Then we'll discuss the different kinds of personal loans available in more detail, as well as who issues them.
Personal loans are great for people who need money soon and might not be able to get approved for other types of loans or credit. Unsecured personal loans can also be great for people who don't have any property to put up for collateral.
Consolidating debt and lowering interest. One of the best reasons for getting a personal loan is to consolidate your debt.
Consolidating your debt means taking on a new larger loan to repay some or all of your existing debts.
That includes things like paying off multiple credit card payments at a lower interest rate. Or refinancing your student loan to lower your monthly payment.
Plus, debt consolidation can help lower the amount of interest you'll pay overall.
Using a personal loan for debt consolidation can have a positive impact on your credit score as well. We'll talk more about that in a minute.
Big life events. A loan can come in handy for happy occasions like having a baby or getting married. They're also useful in unfortunate situations like a divorce too.
When you're faced with moving to a new city or wedding expenses, it can be hard to come up with all of the money on your own. A personal loan can create a buffer between what you need to pay for, and what you can afford right now.
Sometimes paying a bit of interest is worth not having to put those once-in-a-lifetime events on hold.
Medical expenses. You don't need to be diagnosed with a serious illness to rack up a huge hospital bill.
Something as simple as a broken bone can happen in an instant. You can fall off a ladder or slip in the garden even if you're taking reasonable precautions.
I don't want to get too morbid about it, but the reality is that getting hurt or sick is expensive.
If you need to pay your medical bills and your insurance won't fully cover it, a personal loan can be a good option.
Starting a business. I know first-hand how difficult starting a business can be on your finances.
I relied on a number of personal loans to get CreditLoan.com off the ground. From remortgaging my first house to smaller short-term loans.
Having adequate cash flow in the early days of your business might be the difference between succeeding and having to close shop.
Improving your credit. Personal loans can improve your credit score over time in a couple different ways.
A personal loan can improve your credit by adding to your "account mix." Having different types of loans is usually favorable for your credit, and something lenders look for.
It looks better than only having one type of credit usage on your credit report, like credit card debt.
Having a personal loan can also lower your credit utilization ratio. That's the amount of total credit you're using compared to your credit limit. Personal loans help with this since they spread your debt over different loans.
While you still owe the same amount overall, it looks better to creditors if your credit card isn't maxed out.
It's best if you keep your credit cards active even after paying them off with a personal loan.
Although you might struggle to avoid the temptation of using your cards again when you see them with a fresh $0 balance again.
If you think it might be a problem for you, you might want to close your accounts.
You'll take a small hit to your credit score in the short-term. But you can recover from damage to your credit score much more quickly than a large debt.
Credit utilization gets reported to credit bureaus based on your monthly closing date. So anything you can do to reduce your balance during the month will help boost your credit score.
Instead of paying your balance with a single payment at the end of the month, it can help to make multiple smaller payments throughout the month too.
"When it comes to improving credit scores, a personal loan may be a viable option for re-establishing creditworthiness when the proper steps are taken," Marco Carbajo, Founder of BusinessCreditBlogger.com, said.
"For a personal loan to have maximum impact on an individual's credit scores, you should focus on three key things: maintaining a positive payment history, paying more than the minimum amount due each month and reaching a low balance owing (below 30%) as soon as possible."
Personal loans aren't a magic solution. While personal loans can lower your interest payments and make your debt more manageable, it doesn't' make your credit situation go away entirely.
To improve your credit, you'll need to do a few things.
1. Make sure you make your loan payments on time.
2. Don't load up your credit cards with debt again after transferring their balances into a personal loan.
3. Try to pay off your balances in full every month.
This will save you a lot of interest in the long run.
4. Make a budget to be sure that you're only spending what you can afford.
A monthly budget can help you monitor your income and expenses, as well as managing your cash flow.
5. Make sure you fix the root problem.
A personal loan is a great option for bailing yourself out of a bad situation if you find yourself with tons of high-interest debt.
But it's important to think about why your credit got so poor in the first place.
Are you spending too much money every month? A budget is the best way to figure this out.
Are you making too many impulse purchases? Basic things like making a shopping list before you go to the store can help avoid unnecessary purchases.
Do you need more income to allow for your current spending and lifestyle? In that case, you might need to look for a better-paying job. Or alternatively, you can reduce the amount you're spending.
Personal loans can be secured or unsecured.
However, it's worth noting that the vast majority of them are unsecured loans.
These are typically larger loans that you receive when purchasing expensive physical assets
A secured loan is when you pledge collateral or an asset in exchange for a loan.
For example, you might put your house up as collateral in exchange for a loan.
Some common examples of secured loans include mortgages, auto loans, and boat loans.
Secured Loan Pros and Cons
- Secured loans have a number of benefits.
- You can typically get a lower rate on a secured loan. That's largely because the bank's investment is at least partially backed up by a physical asset.
- You also don't need a perfect credit score to be eligible.
- Secured loans typically give you a longer period of time to repay the loan as well.
- Secured loans can be risky.
- If you default on your loan, you can lose your home or whatever asset is being used as collateral.
- Secured loans can also often have variable rates. That means you don't know exactly what your interest payments will be in the future, as they might fluctuate.
- In times of low-interest rates, this can actually benefit you. But if interest rates rise, you'll end up paying more than you would for a fixed rate loan.
This kind of loan doesn't require assets to back it up
Your eligibility for an unsecured personal loan only takes your creditworthiness into account.
As opposed to getting backed up by any kind of collateral.
Unsecured loans include some personal loans, credit card loans, and student loans.
Unsecured Loan Pros and Cons
- Unsecured loans have a simple application process.
- There's also no risk of losing collateral or personal property, since you don't put anything up in exchange for this loan.
- You can usually only get unsecured loans for smaller dollar values.
- They also usually have higher interest rates.
- While you can't lose specific assets as in the case of a secured loan, you can still have a lender come after you if you default.
Variable vs. Fixed Rate Loans
Your interest rate can be static, or it can vary, depending on what type of loan you have
A variable rate loan is one where the interest rate on your loan is subject to change.
The rate you pay will usually fluctuate along with the Prime Rate, which is the lowest rate that banks can borrow money at.
A fixed rate loan locks in your interest at a specific rate. Your interest rate can be fixed over the whole course of your loan.
Or you can have something like a 5-year fixed mortgage where your rate is set for five years. But then you'll need to renegotiate after that point.
Specific Types of Personal Loans
You can get a loan for your specific needs
When most people think of personal loans, something very generic comes to mind.
But a personal loan can actually be for very specific purposes as well. Student loans, auto loans, and mortgages are all specific types of personal loans.
In fact, some lenders specialize in only one niche type of personal loan!
Below I'll discuss some of the more specific personal loans that are available.
Use a new loan with more favorable terms to combine some or all of your existing debts
Debt consolidation loans are great if you have several different debts with high-interest. Using this type of loan lets you clear multiple liabilities and debts at once.
You do this by taking out one larger loan at a lower interest rate to pay off your other loans. Basically, you're combining multiple smaller debts into one larger debt. It usually comes with more favorable terms and a lower interest rate though.
You can use a debt consolidation loan to deal with credit card debt, student debt, and other kinds of debt.
There are a few different ways you can lump your debts into a single payment. One popular way to consolidate all of your credit card debt is to put it all to a single new card using balance transfers. This can be good if you can get a promotional offer on a card with a 0% introductory APR for several months.
It can make your life a lot easier to only have a single loan to worry about every month. Plus you'll probably save a lot of money on interest.
Creditors also offer loans specifically called debt consolidation loans. Although theoretically any situation where you take on a new form of debt to pay off multiple existing debts could be considered a debt consolidation.
There are several reasons that creditors may offer consolidation loans. You can sometimes even get one from your existing lender if you mention that you're having difficulty making your current payments. This is because it maximizes the chances the creditor will be able to collect full payment of your debts.
Debt consolidation loans can be secured or unsecured. Traditionally debt consolidation loans are unsecured. That means they aren't backed by any assets and can be more difficult to obtain. There are also secured debt consolidation loans where an asset like your home or car is used as collateral.
Debt consolidation loans typically have a term of three to five years. There may also be a tax break available for you. For example, the IRS allows individuals to deduct interest payments from debt consolidation loans when home equity is used to secure the loan.
The important thing is to find a debt consolidation loan with favorable terms. If you can't reduce your overall monthly payments, then it's not in your best interest to consolidate your debts.
Also, remember that debt consolidation doesn't erase your original debt. It just transfers it to a different type of loan. Rolling over existing debts into a new loan can also temporarily have a negative impact on your credit score. So that's important to keep in mind as well.
Personal Lines of Credit
Tap into a line of credit when you need it for larger unexpected purchases
A personal line of credit is a lot like a credit card. Instead of being like a loan where you get a lump sum of cash all at once. You have a maximum available balance that you can borrow from at any time.
You only pay interest on the money that you actually borrow from your personal line of credit. In most cases, there aren't usually any fees just for maintaining your line of credit. So if you have an available balance of $10,000 and you borrow $2,000 from it, you only pay interest on the $2,000 outstanding.
A personal line of credit can give you easy access to a large amount of money when you need it. With the added benefit of not having to keep thousands of dollars stored away in your account just in case.
Having a line of credit can be great in case of emergencies. For example, if your car breaks down and needs a major repair, or if you need a new furnace or hot water heater. Some things can't wait, and you might need access to the money right away.
So it can be a good idea to open up a line of credit for some extra security, even if you don't need the money right now. It's way easier to just take money out of your existing line of credit when the unexpected happens. Instead of having to go through the loan process while you're in the middle of a crisis.
That's where personal lines of credit excel. Getting one can help cover you for large unexpected costs that come up in life. But if you need a more structured loan for a big one-time purchase like a new car, then you might be better off getting a different type of loan instead of opening up a line of credit.
Cash Advance Loans
You can use this type of loan to get money quickly, but it might cost you dearly
You can get a short-term cash advance from some lenders. In most cases, you'll find stand-alone businesses that specialize in offering cash advances, and you won't find them offered by most banks.
A cash advance is usually tied to a guaranteed source of income. For example, your paycheck. Lenders that offer cash advances don't usually check your credit. They will use a copy of your most recent pay stub or some other proof that you have the income to repay the loan.
Cash advances are usually unsecured loans that don't require any collateral. However, this type of loan usually has notoriously high-interest rates.
A cash advance might be a good last option when you need a smaller loan for a short-term emergency, and nothing else is available. But you should check out all of your other options before considering a cash advance.
Using your credit card, a line of credit, or pretty much any other form of debt will be cheaper than relying on a cash advance.
If you've gotten to the point that a cash advance is your only option left, you might need to look at other options like debt forgiveness, re-negotiating repayment terms with existing creditors, or other ways to reduce your monthly payment.
The chances are that if all of your credit cards are already maxed out, you're unlikely to be able to repay a cash advance and so you will probably find yourself spiraling even further into debt.
Your bank might be willing to negotiate a way for you to cover expenses in the short term
Banks can be more flexible than you'd think. Like any creditor, they want to maximize their chances of getting repaid in full. They take a loss if you default on your loan, so banks want to avoid that if at all possible.
You might be able to get your bank to give you a short-term loan. Or even simply make an overdraft agreement. An overdraft means drawing more money out of your bank account than it holds. Essentially it puts your bank account into the negative.
Normally there are penalties for trying to make a payment when your bank account dips to $0. These include things like NSF (not sufficient funds) charges for you and the person you're trying to pay. But your bank might be willing to let your bank account temporarily go into the negative for smaller or no fees, if you notify them in advance.
Some banks charge a small fixed fee to get an overdraft limit. Others charge you a percentage interest rate based on the amount that you go into your overdraft balance each month.
Getting approved for a bank agreement depends on your history with the bank and your ability to keep your account active.
You have a better chance if you've been a long-term client at the bank with a record of making payments on time in the past. It's best to speak to your bank to find out how they're willing to accommodate you.
A loan can enable you to purchase your own home
You probably don't know anyone that purchased their home using cash. The vast majority of us don't simply have an extra $100,000 or more lying around. That's especially true for first time home buyers.
A mortgage is a loan specifically used to buy a home, and it's the largest personal debt that most people will take on in their lifetimes.
As a result of their size, mortgages also have the longest terms of any type of loan. If you have a mortgage, you can expect to be making payments for the next 10, 20, 30 years or more.
Before you start looking at open houses, you can choose to get either pre-approved or pre-qualified for a mortgage.
A pre-approval is a letter from your lender telling you how much you qualify for. It requires a hard pull on your credit report. That means it will lower your credit score a little bit, but it's worthwhile because it lets you put offers in on houses knowing exactly how much you can afford to borrow.
Home sellers also like this because you won't need to put a clause into your contract making it "subject to approval." You already know the bank will give you the money you need.
A pre-qualification isn't quite as firm of an offer as a pre-approval. The lender won't do a hard credit pull, but will estimate how much you'll likely be qualified for. This may be useful if you're not sure you're ready to buy yet.
Mortgages usually have a minimum credit score required. There is also a minimum down payment required. The more money you can afford to pay as a down payment up front, the more money you will save on interest charges over the life of your loan.
Plus, if you can afford a large enough down payment, you may be able to waive mortgage insurance, which could save you thousands more over the life of your loan.
Purchasing your own home is a huge life goal for many people, and it's not something to rush into. Making sure you get the perfect mortgage can not only help you get into your dream house but also save you tens of thousands of dollars.
Home Equity Lines of Credit and Home Equity Loans
Tap into the value of your home to borrow money
If you already own a home, you've likely paid your mortgage off at least partially so far. That means you have collateral built up in your home that you can use to borrow from.
One way to use your home equity is through a home equity line of credit (abbreviated as HELOC.) This is a secured line of credit against the value of your home. It acts like any other personal line of credit.
You use the money when you need it, as long as you stay below the maximum available balance. You just need to pay it back as scheduled by the terms of your lender. Your HELOC can be used and repaid repeatedly.
For example, if you're remodeling several rooms in your home over the course of several years, it might be a good option.
Your other option is a home equity loan. In this case, you receive a lump sum of cash instead of an open line of credit.
The FTC (Federal Trade Commission) has set the limit for home equity loans as 85% of your home's value. You also need to take the remaining balance on any existing mortgage into account when determining that number.
For home equity loans, lenders usually look at the LTV, or loan-to-value ratio. This involves comparing the value of equity in your home to the amount of the loan being requested. The higher the ratio is, the riskier the loan is for banks, and the less likely you are to get approved.
Banks might be willing to loan you up to 85% of the value of your home for significant remodeling that will increase the overall value of your home. But they will be hesitant to let you use a home equity loan for an expensive vacation or something that won't provide an asset as collateral.
Get yourself into a new ride today, even if you can't afford to pay cash
More people can afford to buy a car than a house. But the majority of us still need a loan or some type of financing to purchase a new car.
As you'd expect, a car loan is a specific type of loan for people buying or leasing a vehicle. You wouldn't normally think a loan would be required when getting a lease.
After all, you're making monthly payments for a car instead of buying it outright. But many leases still require an upfront deposit that you might need to borrow money to cover.
You can get a car loan through your bank. Or you can finance your purchase directly through the car dealership that you're making your purchase through. Some dealerships offer special promotions, including lower rates or 0% interest for a set term.
Like a home loan, the larger of a down payment you can make, the less interest you'll end up paying over time. So it's generally advisable to put down as much money as you're comfortable with.
You need money upfront to pay for your education. Your degree can allow you to make more money in the future, so it's usually a worthwhile tradeoff
Student loans are specifically used to pay for higher education like college and university.
It can be hard for students to pay for school. Even if you have a part-time job, students often can't earn enough income to pay for school while also attending classes full-time.
If you don't have a scholarship and your parents didn't set you up with a 529 plan or any other type of savings account for school, a student loan might be your only option.
Student loans are offered by private loans as well as by the government at a federal or state level. You can also have your student loan co-signed by a parent in many cases.
When it comes to federal student loans, you can elect for a lower monthly payment, but it comes at the expense of higher interest rates. Most student loan plans are repaid with equal monthly payments over a period of 10 years.
The alternative is a plan where payments start off low and then rise in the amount you have to repay every two years.
You can even get an extended plan that lets you pay off your loan over 25 years. Your payments will be lower on a monthly basis. But you'll pay a lot more interest since the loan is stretched over such a long period.
The government also offers student loans based on income. If you go with this option, you'll pay around 10%–15% of your income to the loan.
Students can normally qualify for a student loan if they use it to pay for school, regardless of whether they have bad credit or no existing credit at all.
Home Improvement Loans
Increase the overall value of your house and fund it using a loan
A home improvement loan is another specific type of loan. It's used by homeowners looking to remodel or renovate their home or property. There are a bunch of different types available, depending on the type of work you're looking to complete.
Some home improvement loans are specifically made for new homeowners. They let you change the structure of the home and also use the money for cosmetic changes.
For example, if you bought a home that hadn't been updated since the 1970s. You could use the money to replace any hideous wallpaper, update your bathroom, buy a new stove, and other similar items.
There are also home improvement loans specifically for changing the structure of your house. As well as loans for people who won't be changing the structure at all.
Plus, there are specific rural development loans that can let you improve the safety of your property. That includes stuff like siding, plumbing, foundations, roofing, or bringing electrical work up to code requirements.
It can be harder to qualify for a home improvement loan than other types of loans. Your home's value and size will play a big factor. Your lender might require an appraiser to confirm that the renovation will increase the value of your home before you can qualify.
You should also consider other types of loans or a line of credit to pay for your home improvement. Just because you're completing a home improvement doesn't automatically mean this is the best loan for you.
You might be able to get the same amount of money with a better interest rate or terms through a different type of loan.
Getting A Personal Loan
There are three basic avenues that you can get a personal loan through:
Peer-to-peer (P2P) lending is when you use an online service that matches lenders with borrowers.
If you're familiar with crowdfunding platforms like Kickstarter, the basic idea of P2P lending should be pretty simple for you to understand.
Some of the most well-known P2P lending websites include Upstart, Prosper, and Lending Club.
The basic idea is pretty simple.
First, you apply through a P2P lender's website.
Individual lenders can then see your credit risk, the amount you're asking for, and details of what you need the money for.
If they are interested in lending money to you, they don't have to lend you the entire amount themselves.
On many sites, lenders can invest as little as $25 into individual loans.
So if you wanted to borrow $3,000, you might get as many as 120 individual investors contributing $25 each.
The peer-to-peer lending platform then pools all this money together and deposits the money directly into your bank account.
You repay your loan directly through the P2P lender's website, and they worry about handing the money back to individual lenders.
Peer-to-peer lending can be a great alternative to going through a bank or financial institution. It basically means you're going through private investors.
P2P lending companies are typically found 100% online, without any physical branches that you can go to.
Not having physical banks to run means they often provide more flexibility and lower fees.
These non-traditional providers often give better terms too. Even people who might get declined elsewhere can get accepted.
Since so many individual investors are taking a small part of the risk from your loan, it's less of a big deal if someone defaults. Although default rates on peer-to-peer loans are actually lower than traditional loan sources.
Looking out for questionable companies and scammers is especially important if you decide to use peer-to-peer lending for your next personal loan. Make sure you read the fine print.
Do some research about the background and history of the company you are looking at borrowing from. Look out for hidden fees and fraudsters too. It's good to read online reviews and ask around for referrals from people you know and trust.
If you have any doubts, be sure to go with one of the larger and most well-known P2P lenders.
When you think to yourself about getting a loan, banks are probably the first thing that comes to your mind.
Popular banks that offer personal loans include Wells Fargo, Citizens Bank, and Bank of America.
In the past, banks used to be the only real option that people had. Today, banks have more expensive rates than other options, on average. But that might not be the case for you if you're already a valued customer.
It's generally easier to get a personal loan that you already deal with. So if you want to get a personal loan from a bank, I'd start with the one you already have a checking or savings account with.
The process is fast, secure, and there is no charge to find a lender. All credit types are welcome and the funds could be deposited directly into your bank account as soon as tomorrow.Get a Personal Loan
Getting a personal loan from your existing bank can be convenient.
It gives you the option and ability to move money between your personal loan and checking or savings accounts more easily.
There are other institutions besides banks that offer personal loans.
The most available option in this category is credit unions.
Credit unions are not-for-profit organizations which are usually community-based.
They usually offer more flexible loans and better rates than large banks.
Credit unions are usually more focused on their member's needs than profit.
But credit unions also sometimes lag behind in technology like mobile banking, and they often have fewer perks too.
As I talked about in the previous section, there are several different lenders you could go through to get a personal loan.
These include banks, credit unions and other institutions, and peer-to-peer lending services.
When you're looking for the right lender, you should keep these factors in mind:
Look for the lender that can offer you the lowest rates.
On larger loans, even a small difference in rates can add up to hundreds or even thousands of extra dollars in interest.
Look for payment terms that will work for your personal situation.
If you can do a shorter term, your loan will get paid off faster, and you'll pay less interest. But if you have other financial obligations, you might want to opt for a longer-term loan.
Look for payment terms that don't charge a prepayment penalty. Particularly if you think that paying off your loan early might be a possibility for you.
Watch out for extra charges
Read the fine print to make sure there aren't any details you don't want to agree too.
Pre-computed interest is something to keep an eye out for.
It's a method of calculating loan payments where all interest for the term of the loan gets added to the principal amount. Less of each payment goes toward paying down the principal with this type of interest. And there's no way to save money by paying early since interest gets added into the loan from day one.
Insurance within the loan is something to look for as well. Insurance is commonly required on larger loans like mortgages if you don't have a large enough down payment.
But you should be able to find a personal loan without an extra charge for loan insurance.
Origination fees are also something to consider in the cost of your overall loan.
They are the fees a lender charges you to process and manage the loan. So the actual fee amount varies between lenders, and some online lenders don't even charge them.
Be aware of these things when considering a lender:
Lack of disclosure
You want full disclosure of all documents and fees associated with your loan. You should be very wary of any lender that doesn't disclose all this information.
If a lender encourages you to overstate your income, this can be a warning sign too.
Lenders want to get you to borrow as much as possible. This is because they make money on the interest you pay. But some lenders take this too far and may try to stress your finances past what you can afford.
Requiring upfront fees
You shouldn't need to pay any fees to apply for a loan.
Anyone trying to charge you before the loan gets finalized might be trying to scam you out of a fee and then simply tell you that you've been rejected.
No credit check
If you are able to get a loan without a credit check, something is probably fishy. Especially if they're also not requiring collateral, or some other repayment guarantee.
Any legitimate lender should be doing a credit check before considering you for a loan. Even if it's just a soft pull to determine your initial eligibility and what rates to offer.
You want all of the terms and agreements regarding your loan in writing.
If your lender isn't able or willing to provide paperwork, something is probably up.
Getting asked to wire money
There shouldn't be any large amounts of money that you need to pay in order to get a loan.
So any request to wire money should be a red flag.
Be especially cautious of any transactions using Western Union.
Many shady people and scammers often use it, since it's nearly impossible to trace or reverse payments.
No physical address or ability to contact by phone
Even online platforms like peer-to-peer lenders should have a clear "About Us" or "Contact Us" page on their website.
It should give their full address and phone number. Be suspicious of any lender that isn't willing to share their physical address.
If you're on the fence about the legitimacy of a lender, you might want to do some due diligence. You can look up a prospective lender's address on Google Maps, or call them and see if someone professional answers the phone.
You can also search online for "(lender company name) scam" to see if any complaints come up.
Unprofessional email address
Lenders won't use a free email address on sites like Hotmail, Gmail, or Yahoo. They should have their own business email with their registered domain in it.
If a lender or their salesperson is coming on too strong, it's a good sign that you should take a step back.
Don't get talked into taking any loans you don't need, loans for a larger amount than you need, or one with unfavorable terms.
At the end of the day, you don't need to be Warren Buffett to choose the right lender for you. It just takes a small bit of research and comparing lenders. You can do most of it online.
Know that having a personal loan impacts your credit score
Which means it can hurt your credit score if it's not well managed.
It's important to make sure you are capable of paying your monthly amount in full and on time every month.
Know the effects of defaulting on your loan
Defaulting is when you fail to pay your loan.
This has a number of negative impacts.
Your credit rating will drop, and you'll incur penalties from your lender.
Your account will also get sent to collections. This means you'll start receiving calls and visits from aggressive agents.
You might end up with a lien on your property or your income. This is when a lender makes a claim to your property until your debt gets paid.
It will stop you from being able to sell or refinance your house. Your lender could even garnish your wages.
If your loan is secured, the lender might take whatever you've put up as collateral. This can mean taking your home or repossessing your car.
If you had a cosigner on your loan, the lender could go after that person for the balance of the loan too. Their credit score can also get affected. Not paying your loan can impact other people besides just you!
Defaulting on a loan isn't a fun experience for you or the lender. And it can have a major impact on your ability to get credit again in the future. So you should really avoid it at all costs.
Research your credit score
Your credit score will impact the loan amount you're eligible for.
Plus the payment terms and interest rate you'll pay.
Get a copy of your credit report in advance and check it for errors or issues that might be lowering your score.
Look at your overall debt situation
Look at how much money you earn compared to how much debt you have.
A good way to sum this up into a single number is to calculate your monthly debt-to-income ratio. This is your monthly debt divided by your monthly income.
In order to calculate it, you add up all your monthly debt payments, including your mortgage, car loan, student loans, credit card payments, other loan payments, and other requirements such as alimony or child support.
Then, figure out your gross monthly income. This is the amount you get paid every month before taxes and other deductions. Make sure you include all sources of regular income, including things like child support.
Now, simply divide the first number by the second one. Then multiply by 100 to get your percentage.
Ideally, you want your debt-to-income ratio to be 36% or less.
Another convenient ratio to consider is your credit utilization ratio.
You can find out your credit utilization ratio by dividing your current credit balance by your available credit limit.
Credit utilization ratio = Credit balance / Available credit limit.
Your credit utilization ratio should ideally be below 30%–40%.
If your ratio is significantly high at 80%–90%, then you're getting dangerously close to maxing out your available credit.
You should shop around
Look at different lenders and all of the options they have available to find the deal that's right for you.
Borrowing From Family and Friends
Getting a loan from someone you know can save you money, but it can also strain your relationship
It can seem tempting to get a loan from family or friends. You might be able to negotiate a lower interest rate, or no interest at all. As a parent or relative, you might feel obligated if someone you love asks to borrow some money.
More often than not though, borrowing directly from someone you know can be a mistake. If you fail to repay your loan, you'll be hurting someone you care about and may ruin your relationship forever.
Most people don't have the liquidity like large banks and financial institutions to risk losing money. Borrowing $20 or $100 might not be a big deal. But if you're asking for thousands of dollars, you're likely asking that person to tap into their life savings or emergency fund to help you out. If they don't get the money back, it might mean things like not being able to retire on time.
Borrowing from family and friends can also create a sense of complacency. Since the bank isn't going to be knocking on your door if you miss a payment, you might be a bit more relaxed about paying on time. Family and friends will often be too polite to hound you for payments, and will let it slide for a time. Before you know it, you might be multiple payments behind.
Getting a loan from individuals can also cause tax problems. If one of you claims interest on the loan as an expense while the other doesn't claim it as income, you might attract the attention of the IRS.
Borrowing from people you know also won't help build a good credit score, like borrowing from a bank or financial institution will.
If you do decide to borrow from family or friends, there are some things you should discuss first.
- The lender should know what the money will be used for. Whether it's a large or small loan, they have a right to know. You might be okay lending your brother money to buy a car so he can get to work. But you might not want to lend him money for a vacation.
- You should set out terms of when the loan will be paid back. Ideally, you would draft an actual legal contract that lays out all the specifics of the loan. But at a minimum, you want to discuss how the loan will be repaid. Will it all be paid back at once, or a little bit every week or month? Will there be interest?
- For large loans, it could be worth getting an actual lawyer to write up the conditions of the loan. For loans of $10,000 or more, you might even want to include details such as what happens if the debtor or lender dies. Otherwise, you might create a family feud.
- Both parties should take the borrower's financial situation into account as well. It can be uncomfortable to discuss. But both parties should be confident that the loan will be able to be repaid. It's not worth losing a best friend or having a sibling who won't speak to you anymore over a loan.
Here are some financial terms related to personal loans that you should know
- This is the amount you're looking to borrow. For example, if you apply for a personal loan of $5,000, that amount is your principal.
- The additional charge you have to repay over time. This is the cost you pay the lender for being allowed to use their money.
- APR (Annual percentage rate.)
- The APR takes both your interest rate and any lender fees into account. It gives you an overall picture of the cost of your loan.
- Lenders usually tell you what terms they offer. A term is the number of months you'll have to repay the loan in full.
- Monthly payment
- The amount you have to pay every month. It includes the principal amount that you owe. As well as part of the total interest that you'll owe over the term of the loan.
- Secured loan
- A loan where you put up some form of collateral, usually an asset like your house or car.
- Unsecured loan
- A loan that relies solely on your creditworthiness and isn't secured against any assets.
- Peer-to-peer lending
- A service that matches borrowers with individual lenders. Your larger loan usually gets split up amongst many lenders who each contribute a small amount. P2P lending is done almost 100% online.
- Origination fee
- This fee gets charged by the lender when you enter into a loan agreement with them. It's their cost to process your loan.
- Prepayment fee
- You'll pay this fee if you pay off the loan too soon. Not all personal loans have this.
- Pre-computed interest
- A method of calculating loan payments. All interest which will be due over the term of the loan gets taken and added into the principal amount of the loan.
- Loan protection insurance
- A type of insurance that protects you in case you aren't able to pay your loan.
- Someone who signs for your loan with you as support for the credit. They become responsible for the obligation to repay the loan if you don't. Also known as a guarantor.
- Credit application
- A form used to apply for a credit amount. It includes details like your residence, employment, income, and existing debt. It allows a lender to determine your creditworthiness.
- Credit score
- . A number between roughly 300 and 850. It's used to measure your creditworthiness. The most well-known kind of credit score is the FICO score. It represents a mathematical formula based on various pieces of information from your credit report.
- Fair Credit Reporting Act (FCRA.)
- This federal law was established in 1971 and later revised in 1997. It gives consumers the right to see their credit records and correct any mistakes.
- Fixed rate loan
- A loan where the interest rate and payment amount remain the same over the whole life of the loan. On this type of loan, you make equal monthly payments until the debt is fully paid.
- A legal process that lets a creditor take funds from your bank account to satisfy a debt that you haven't paid.
- A federal court proceeding that a borrower can use to relieve debts by transferring assets to a trustee. If you file bankruptcy, your credit report will have a record of it for up to ten years.
- Someone who doesn't pay cash for a purchase, but finances some or all of it.
- This is the gradual reduction of debt as you regularly make scheduled payments of interest and principal.
- Consumer loan
- Any loan where an individual person borrows money from a lender. It can be either unsecured or secured. There are several types of consumer loans including mortgages, personal loans, student loans, credit cards, and more.
- These loans are smaller than some traditional loans. Typically a microloan is in the $1,000--$3,000 range. Although they can go as high as $50,000. They are often used to fund the startup of small businesses.
- Prime borrower
- This is usually defined as someone with a credit score above 720. They would have no delinquencies on their credit report and more than six years of credit history.
- Cooling-off period
- Most personal loans come with a 14-day cooling-off period. This gives you 14 calendar days, or two weeks, to cancel the contract without incurring any penalty or charges. Make sure you read the fine print in the loan terms, as the time period and conditions may vary across lenders.
Loans are a major part of how banks make their money.
The exact technical details of loans can get complicated, even for financial experts.
But here's the short version of how the loan creation process works:
Banks take money from customers in the form of deposits.
Then they turn around and lend extra reserves to clients as loans. They charge a certain percentage of interest on these loans.
The people who get the loan pay it back to the bank with interest.
And the overall quantity of money that the bank is holding increases over time.
When you apply for a personal loan, you're borrowing from the bank's reserve and agreeing to pay back more than you borrowed.
Banks take your income, credit history, and other information into account.
They use this information to determine how much they feel comfortable lending you.
They approve the amount they feel comfortable with, after taking the risk of you defaulting on your loan into account.
Here's what you'll need to get qualified and approved for a loan:
Your credit score affects whether you'll get approved for a personal loan.
As well as the terms and interest rate of your loan.
We discussed this briefly earlier, but here are the general ranges again:
- 800–850 – Exceptional
- 740–799 – Very Good
- 670–739 – Good
- 580–669 – Fair
- 300–579 – Poor
You can get a personal loan even with a poor credit score.
But your interest rate will be significantly higher than someone with good or excellent credit.
The same lender might offer a loan with an APR of 5.29% to someone with a credit score of 620.
But someone with a credit score about 760 might be able to get a rate of 3.70% on the exact same loan.
If you need a large loan, payable over several years, that difference can add up to thousands of dollars.
Proof of income
You might need to provide proof of a consistent and stable income to get a personal loan.
This includes things like recent pay stubs from your employer and bank statements.
If you're self-employed, you'll likely need to provide your latest tax filing to prove how much money you made last year.
If you're offered too high of a rate or get rejected, you'll need to decide if you're willing to put up collateral or get a cosigner.
There are a number of reasons why a lender might decide not to give you a personal loan:
If you have poor or thin credit history, you might get declined too.
Although even if you have poor or no credit, you can usually find a lender to fit your needs.
You just might not get the best possible rate or terms.
Having too many inquiries into your credit record can be a red flag for lenders too.
Inquiries are when a potential lender runs a hard credit check on you.
Soft credit checks won't affect your credit score or show up on your credit report.
If you have discrepancies on your credit report, this might lead to you getting declined for a personal loan too.
That's why it's vital to check your credit report regularly and make sure everything is accurate.
You're entitled to get one free credit report each year through the major credit bureaus. And most banks even offer them free to customers more frequently.
So there's no reason not to stay informed.
Of course, there can even be inaccuracies or errors in the loan application itself, so be sure to look it over carefully.
High debt ratios
A high debt-to-income ratio or credit utilization ratio also doesn't look great to lenders.
Both of these ratios basically signal to prospective lenders that you're reaching the limit of what you can pay off each month.
Having too much debt makes lenders see you as a greater risk of missing payments or defaulting on your loan.
If you've filed for bankruptcy in the past or you're currently filing, obviously a lender isn't likely to want to deal with you.
If you're unemployed or have an unstable work history, you might get declined for a loan too.
I ran into this issue when I started my own business.
Lenders want to see something tangible to prove you're making money, like a paystub.
But in your first year of business, this can be especially tough, since you don't have tax returns or anything else to prove your business income.
If you're unemployed, self-employed, or doing temporary work, you might need a cosigner in order to get a personal loan.
Decide if you should get someone else to sign for your loan as well
If you decide to get a cosigner, you'll want someone with a good credit score and a pretty solid credit history.
Your lender will evaluate your cosigner based on their income, ability to pay, and general financial stability.
Pros and Cons. Having a cosigner might get you your loan, but it comes with downsides too.
On the plus side, you're more likely to qualify for a loan.
You'll likely get a better interest rate. Plus you can use the cosigner to build your own credit score.
The downside is that your cosigner is responsible if you can't pay.
Your cosigner should know what they're signing up for. They should know that signing their name on your loan is a big commitment. If you stop paying the loan, they'll be expected to make payments.
Your lender can take the same legal actions against your cosigner as they can against you. That includes suing them or garnishing their wages.
The other option for your cosigner, in this case, is to make your payments for you. But this will still cost them money.
Cosigning will also affect their ability to get their own additional credit. Cosigning shows up on your credit report and counts toward your overall debt.
Being a cosigner can strain relationships between family members or close friends if the borrower isn't able to pay the loan.
How long will it take before I get my money?
The amount of time it takes to get approved for a personal loan varies.
On peer-to-peer lending sites, you might be automatically approved for a loan within minutes of filling out your application. Although then you need to wait to have your full loan amount pledged by individual investors.
Applying for a personal loan through a bank or a credit union usually means you'll wait at least three days to get approved.
Disbursal, or actually getting the funds, takes about five business days after you're approved.
The process is fast, secure, and there is no charge to find a lender. All credit types are welcome and the funds could be deposited directly into your bank account as soon as tomorrow.Get a Personal Loan
But this will vary depending on the lender you're working with and your individual situation.
Some online lenders, especially microloan or small loan companies boast that you can receive your funds within 24 hours or less.
So if you need money fast, make sure you take timing into account, when you're shopping around.
When your loan gets approved, there's a number of ways you can receive the funds. Most banks will deposit the funds, minus any fees, directly into your bank account.
If you already do your banking with them, this is a convenient option that gives you immediate access to your money.
If you're getting a loan from a peer-to-peer lender, they normally do an electronic transfer of the funds directly into your bank account.
However, if you're using the loan to pay for something specific like a car, your bank can send the funds directly to your debtor. This also occurs with debt consolidation loans. This way, you don't have to worry about handling the money yourself.
Managing Your Loan
So you've got approved for your loan and received the funds, now what?
Once your personal loan has been approved, you need to remember to keep track of it!
Most lenders provide plenty of resources to keep you up to date. This includes updates, email and text notifications, and statements. These give you information about your balances, payment due dates, and more.
How do you make payments? It really depends on your lender, but normally there are multiple ways to make payments.
The most common ways to make payments are online, over the telephone, or by mail.
Online payments are the fastest and easiest. Your payments will get processed quickly, and your balance will get kept more up to date. Plus they're convenient. You can make online payments in your pajamas at 11 pm on a Saturday if you want!
Phone is the next most convenient. Simply call and give your payment information over the phone. The downside is that most lenders only have their staff answering phones during certain hours.
Mail is an option, although not the most practical one. You'll need to manually mail a check to your lender. This involves paying extra for stamps and having to walk to the nearest mailbox or post office. You also have to leave several extra days in advance for your payment to travel through the postal system and get processed.
Many lenders offer auto-payments. This is the most efficient option of all, if it's available to you. Just set up a direct withdrawal once and your lender can automatically take your payment from your bank account each month.
As long as you've got enough funds in your account to cover the payment, this means no more late payments or worrying about forgetting to pay on time!
What happens if you're late to make payments? You can face a couple different penalties if you miss a personal loan payment.
I have to confess, I've had student loans that fell through the cracks once or twice. It slowed down my access to more credit in the future by a lot.
At first, you're likely to receive a late fee from your lender. Consider this your warning.
If it's your first time accidentally missing a payment, you might even be able to call your lender and ask them to forgive it this one time.
If you still fail to make a payment, your credit score can get affected.
Credit bureaus don't consider a payment late until it's more than 30 days past due.
So you're safe from accidentally missing a payment affecting your credit for the first month it's overdue.
But, if you're 60 days late on a payment, it will hurt your credit score even more.
Missing a payment by 90 days or more can cause significant long-term damage to your credit.
Once you're over 30 days late, your lender may even get a collection agency involved. This is a third-party company that will phone and write to you to try to recover the overdue payment.
The bottom line is this: you should try to avoid late payments whenever possible!
If you think you're going to struggle to make your next payment, it's always better to contact your lender and try to work out a deal.
Most lenders would rather get paid a little less this month than not get paid at all.
What if you want to repay early? Some loans will charge a prepayment penalty if you try to repay early.
Sometimes it can be worth paying this extra fee, but it's often better to just continue to make payments as scheduled.
Make sure to read the fine print of your loan before you sign up to know if it includes any prepayment penalty.
Other loans have precomputed interest.
This means all the interest gets added to the principal of the loan when it's created.
In this case, there's usually no prepayment penalty, and it won't affect your interest to pay the loan off in full ahead of schedule.
The best case scenario for paying off your debt early is a loan without precomputed interest that also has no prepayment penalty.
In this scenario, paying early can save you money that you'd otherwise pay in interest.
That's because interest gets charged each month on only the remaining balance on your loan.
Can you make changes to a personal loan once it's approved? Usually not.
Once your loan has been approved, you're tied to its terms until it's paid off in full.
However, you can try to refinance your loan on more favorable terms.
Refinancing is when you take an existing debt and replace it with a different debt.
For example, if you signed up for a personal loan with a 15% APR but then you find another lender willing to give you a loan for 10% APR.
You can refinance your loan by taking out more funds at 10% and using them to pay off your 15% loan in full.
Refinancing your loan might also allow you to change the terms of your loan to a shorter or longer period.
If your credit score has improved since you initially took out your loan, it's worthwhile to see if you can now get better terms and rates.
Here are some of the most frequently asked ones:
- What is the difference between a personal loan and a consolidation loan?
A consolidation loan is a loan specifically used to pay off several smaller loans or debts and create a single large loan.
This is usually done to get a lower interest rate compared to all of your existing loans. Personal loans can be used as consolidation loans.
But they also have more extensive options and can be used for basically anything you want.
- What is the difference between a personal loan and a business loan?
Personal loans are usually easier to get than business loans. Personal lenders usually just look at your credit score.
But business lenders will look at your financial statements, personal credit, and business credit. Getting a business loan can be much more time consuming and has stricter requirements.
Business loans are also more likely to be secured than personal loans. However, business loans usually have lower interest rates.
- What is the difference between a personal loan and a car loan?
Obviously car loans have restrictions on how they're spent. It's exclusively used to finance the purchase of a car.
Car loans usually offer a lower interest rate, and they're easier to obtain with a poorer credit history.
However, you usually don't have the title of the car until the final payment on the car gets made.
An upfront deposit is normally required to secure a car loan as well.
On newer models of cars, a car loan is probably the better choice. But you can probably get away with a personal loan for a cheaper car.
- What is the minimum credit score that you need to get a personal loan?
Theoretically you could get a loan at any credit score. However, the lower your credit score is, the more expensive the loan will likely be.
If you have a credit score below 620, the loans available to you will have very high APRs.
- Do I need to be employed to get a personal loan?
No you don't. But it might be harder for you to get a loan than someone who is currently employed. Lenders want to see proof that you have a source of income.
This doesn't need to be a pay stub though.
Providing several months of bank statements showing your monthly income, your income tax returns, or other proof of income is usually enough.
- What does pre-approval mean?
In the lending world, this has two meanings, which can be confusing.
In the context of personal loans, pre-approval can mean that a lender thinks you're creditworthy enough to guarantee you a product.
This is fairly rare and is usually referred to as pre-qualification instead. Your bank might offer you a pre-approval based on your credit history, your income, or your savings history.
The second meaning of pre-approval specifically relates to mortgages. A mortgage lender can run a credit check on you and verify your income.
Then they can assure that you'll get a loan up to a certain amount. This helps home buyers know the price range of a home they could afford.
- Will getting a quote for a personal loan affect my credit score?
Usually not. But it depends if your lender runs a soft or hard inquiry.
Soft inquiries are normally used to give customers a pre-approval or a quote. A hard inquiry is normally used when you actually apply for your loan.
- What is loan protection?
Loan protection is a form of insurance that protects your personal loan. It can cover your loan payments in the event that you're unable to meet your financial commitments.
This can be due to loss of life, illness, injury, or unemployment. Getting insurance on your loan typically costs about 2%–3% of the value of the loan.
Loan protection is hotly debated by some, but it can provide valuable protection in case you aren't able to make payments.
- Will getting prequalified for a personal loan affect my credit score?
Most lenders perform a soft credit inquiry to show you what offers you qualify for.
This is great because it lets you compare multiple personal loan offers without taking a hit to your credit score.
- Why does a personal loan have a higher interest rate than my mortgage or auto loan?
Mortgages and car loans are secured loans. They're backed by a physical asset. So if you default on your loan, you risk losing the asset.
If a personal loan is unsecured, it's solely based on your creditworthiness. The lender has no collateral and assumes all the risk of you not paying.
This higher risk for the lender is why unsecured personal loans come with a higher interest rate.
- Am I eligible for a personal loan?
To get a personal loan you'll need a regular source of income. This can be a salary from a job, being self-employed, or a professional.
Your financial eligibility is also affected by your credit history, where you live, and other factors as well.
- Is there a minimum or maximum personal loan amount I can borrow?
Yes, but it varies from lender to lender. Generally, the lowest amount you can borrow with a personal loan is $500. The maximum can be $100,000 or more.
Although lenders are generally hesitant to give a personal loan for more than 30%–40% of your take-home salary.
- What's the best way to work out the cost of my loan?
The APR plays a big part, but it isn't the only figure you should look at. Focus on your monthly repayment and your total amount payable.
Your total amount payable includes other charges and fees. It's generally a much better reflection of what your loan will cost you.
If this information isn't available on your lender's website, you'll get it in your pre-contract information. Your lender will give you this before you enter into a loan agreement.
- Should I borrow from my bank?
Your bank is likely to be happy to lend money to you if you've got a good credit history. But it might not be the best deal for you.
I recommend shopping around to find the most favorable rate. And make sure to always read the terms and conditions before choosing a final loan to go with.
- Is it cheaper to borrow with a loan or a credit card?
It depends on what agreements you have in place with your lenders. But a loan rate tends to be lower than credit cards.
However, some credit cards have deals like introductory 0% APR for 12 months and similar deals that might be a good way of handling debt too.
- Do all borrowers get charged the same rate for a particular loan?
No. Your interest rate will be largely linked to your credit rating and the lender's criteria. Your interest rate will be higher than the prime rate depending on your credit rating.
If you have excellent credit, you might only pay a little above prime. But if you have poor credit, you might pay significantly more, or may struggle to borrow at all.
- Is it better to save or overpay a loan?
Most of the time you receive a higher rate of interest on loans than you could receive from savings and investments. So it's worth paying down your debt first in most cases.
Although it's always good to hold back a bit of savings as an emergency fund.
- What is compound interest?
It's interest that's paid on interest. Sound confusing?
Basically, it can cost you a lot of money if you're in debt for a long period of time. But on the other side, compound interest allows savers to really grow their savings.
- What's a payment holiday?
If you struggle to repay your loan, a lender might be willing to grant you a payment holiday.
This is a special agreement for a short period of time where you don't need to make repayments. It can be helpful in the short term.
But remember that your loan will take longer to pay off.
And your loan will continue to accumulate interest during the payment holiday period, meaning more to pay off in the long run.
They can help you pay down your current credit. They can help you get a lower interest loan, and even provide a financing solution when you've got turned down for other loan options.
It's crucial that you understand what a personal loan is before you get one. As well as the differences between it and other credit options.
Be ready for what's required to apply. Use this guide to figure out which type of loan and lender will work best for you.
Make sure to research your lending options and know what to watch out for. A bit of research can potentially save you thousands of dollars in the long run.
Keep in mind that personal loans still impact your credit rating. There are essential steps to take if you need to improve your credit before applying for your next personal loan.
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