Considering a personal loan? They can be a great tool for doing small home repairs, consolidating debt or even taking a family vacation. There sure are a lot of different types of personal loans though and what that means is that you need to educate yourself before you get started.
Take a look at some of the basics on personal loans that you should know.
1. What Exactly Is A Personal Loan?
Let’s start with the basics and talk about what a personal loan is.
In a nutshell, it is money that you borrow and then pay back over time with interest and/or fees. It can be in just about any amount from 350 dollars to 3500 dollars or even 35,000 dollars.
Personal loans, often referred to as installment loans can have varying loan terms. The length of the term is usually a reflection of the amount of the loan. The more money that the loan is for, the longer the term is likely to be.
Most loan terms will be from 6 months to 60 months, but loans can be shorter or longer. It depends on the money involved, your credit and your lender.
2. You Can Have Good Or Bad Credit.
If you have good credit, you can obviously secure a personal loan and you are likely to receive very good terms. With good credit, a personal loan can be had with interest rates in the lower single digits.
With bad credit, you also may be able to qualify for a loan but the terms of the loan will often be harsher. Interest rates are likely to be in the teens or higher with bad credit and the likeliness of fees being added on top of the interest increases.
Still, a personal loan with bad credit could be a viable option if you need some fast cash. You just need to make sure that you weight the total cost of the loan against the benefit to you.
3. There Are 2 Types Of Loans.
These loans come in 2 main varieties. You have a secured loan and an unsecured loan.
With a secured loan, property will be used to guarantee the loan. This could be property that you own or it could be the property that the loan is being used to buy.
If you were to default on a secured loan, your lender has every right to seize your property. It would then be sold to pay off the lender. Any additional money from the sale would go back to you. If the sale of property was not enough to pay the lender back, you would still be liable for this amount.
With an unsecured loan, the lender will loan you money based solely on your credit worthiness. If you defaulted on the loan, the lender will likely sue you but they have no property to claim.
4. You Can Get Them Locally Or Online
Traditionally, you have had to go with a local bank to get your personal loan. This still remains a viable option and many still choose to go this route.
Over the last few years however, online lending has become a lot more prevalent. As a culture, we are begging to do more and more online and the recent pandemic has only increased this. The allure of an online loan is not hard to see.
Tops among reasons that people are going online is that it is fast and convenient. You can get your do most or even all of the work online and lenders can process it all electronically. Then, loans can be funded as soon as the next business day. Local banks do not tend to work as fast.
5. They Affect Your Credit
Personal loans will affect your credit score in good and bad ways, it depends on your unique credit profile. Here is what I mean.
Initially, the credit inquiry could cost yo a point or two. Not a big problem unless you are applying with a dozen loan providers. Inquiries will drop remain on your credit for 2 years but they atop affecting you after 1 year.
If you take out a loan, it could cause your score to dip or increase. The initial added debt to your score could cause a drop of around 10 points to an average credit score. It could also cause your score to increase by around 10 points if the personal or installment loan increases your credit diversity.
Overall, over the course of a personal loan, your credit should benefit. This is, of course, assuming that you make the payments on time.
6. You May Have Better Options
A personal loan is great, but you might have other options that fit your situation better.
If you just need several hundred dollars, for example, you might be better off using a credit card to pay for the expense. A credit card, even a new credit card may be less of a hassle to obtain.
Own a home, then maybe a HELOC would be an option for you. A Home Equity Line Of Credit will often have very low interest rates and it is revolving credit. That means that you can use your line of credit again and again just like a credit card.
Another example might be if you have bad credit and you only need a small amount like a loan for 400 dollars. If this is your case, your loan would likely have high fees and/or interest and you might be better off pursuing a loan from friends or even selling some property.
7. There Will Be Costs Involved.
Just get that straight going in. If a lender is making you a loan, they need to make a return on their money. The worse your credit is, the higher return they will intend to get.
This is the main expense on most but not all loans. Interest with excellent to fair credit will often range up to 36 percent. If you have bad credit, a sub rime lender could stick you with an APR that is even higher.
The most common fee that you will find is an origination fee. This is an amount added right on top of your loan and it is usually a percentage of the loan value.
Other fees involved could be pre-payment fees and late fees. Be sure to read your loan contract thoroughly before accepting it.