Credit cards are not the only way to consolidate your debt, finance your purchases, or get quick access to funds for emergencies. Personal loans are a fantastic option for people looking to get big-ticket items or meet any potential shortfall within a home. But what is a personal loan, exactly? How does it work? How do you make sure you can pay it off on time?
Here’s everything you need to know about personal loans – from application to paying it off. If you’re allergic to borrowing money because of its complicated nature, this should make it a little easier for you.
What is a Personal Loan?
Personal loans are money that you borrow from an entity, usually a bank or a different financial institution, carrying a fixed repayment schedule and consistent payments monthly. These are unsecured loans too, which means they don’t require borrowers to set any existing asset to work as collateral for the money.
Unlike some loan types, you don’t need to justify the reason for applying for a personal loan. Borrowers are not restricted as to where they can use their loan money, compared to home or car loans.
Much like any loan, these are provided by banks under several criteria, which include but are not limited to credit score, income level, repayment capacity, history of employment, and more. Since it’s unsecured, lenders cannot auction your properties under collateral, hence you can expect a slightly higher interest rate.
But perhaps the best part of a personal loan is its fixed interest rate. It also uses a fixed repayment timeline, which makes it easier for clients to figure out their entire loan. Whether you’re looking to use it to pay for higher education or big medical contingencies, getting a personal loan can save you during a rainy day.
How Does a Personal Loan Work?
If you plan on getting a personal loan, the first step is to start the application process with the financial institution of your choice. It can be a bank or any qualified lending company, but it all starts with completing an application form and providing all required documents.
Personal loans value in amount, usually around $1000 up to $100,000 for some finance agencies. The interest rates for a personal loan can range between 2.99% up to around 36%. Borrowers will also get somewhere between one to seven years of repayment time.
Once you submit your application form, including your choice of amount and repayment schedule, all you can do is wait. Depending on the financial organization, you will likely get an answer within a few hours up to several days. If you get loan approval, you will get an almost immediate disbursement and you can use the funds for whatever purpose you have.
You would also receive your first date of payment, which is likely a few weeks after your loan. On-time payments will reflect positively on your credit history and vice versa. Lenders will continue reporting your progress, so it’s vital to not only pay your bills but pay on time.
What You Need To Learn When Getting A Personal Loan
The most important part of learning how personal loans work is understanding the black and white. These specifics can help you understand the moving parts of your loan and enable you to pay on time. Some of the crucial details of a personal loan that every borrower must understand include:
- Monthly payments – these are your fixed monthly payments, calculated using the value of the principal and interest. Depending on how long your repayment timeline, you can get a much lower monthly due but a higher interest rate over time.
- Annual percentage rate (APR) – personal loans normally charge a fixed APR, which changes according to creditworthiness, personal income, and more. This also determines the interest rate of the loan throughout its lifespan.
- Repayment timeline – this is the period of time the lender gives you to pay off your loan. A personal loan usually has, on average, between one to seven years for its timeline.
- Origination fees – these are usually fees on top of the original principal, usually going at around 6% of the total principal.
Your loan rates vary depending on your lender. Many set a fixed APR for borrowers, which means you’ll know how much you can expect to pay over your repayment period. Your APR comes from a set of different factors, including your existing credit score.
Those who have a good credit score can qualify for the lowest rates, with the best rates available only to those with a credit score of above 700. Annual income and payment history can also be a factor. The APR will also include fees incurred by the lender.
Quick Tips To Repay Your Personal Loan
Now that you know what a personal loan is and how it works, you need to know the best tips on managing your loan payments. Knowing the right things you can do to pay off your loans quickly and consistently can prevent you from defaulting. It’s not only a matter of paying early too, but rather managing your finances to make payments easier.
The first order of business when paying off your personal loans is to understand your priorities. Your monthly expenses, including food, rent, and loans, take precedence over everything. It’s best to buy luxuries only if you have disposable income, setting aside money to make sure your monthly expenses are paid for.
It’s no secret that paying regularly and consistently is a simple but effective strategy. Skipping on payments is not something you want, as not only does it cost you more money down the line, it can also lower your credit score.
If you have extra money, it’s best to set aside enough for savings. Rather than putting it towards an extra loan payment, secure a safety net for yourself. This prevents any surprise expense from cutting on your money that has been set aside for regular expenses.
It’s also a good idea to consider potential prepayment fees, too. If the prepayment fees, a set amount that a lender charges you, are higher than your interest rates, you might want to wait it out and pay on time.
Is a Personal Loan Right For You?
Now that you know what a personal loan is, do you think it’s right for you? If you need to borrow money to complete a crucial purchase, a personal loan might be a good idea. The fixed monthly rate, decent APR, and fixed repayment timeline allows for a predictable payment structure.
Want the best loan rates? Start building your credit score and keep other loans to a minimum. It’s also best to look for the most advantageous personal loan rates and repayment timelines.
If you’re looking for more information about personal loans, contact us now and find out exactly what you qualify for and what will be the best option for you.