Overview
Whether you hope to consolidate high-interest debt, cover an unexpected medical bill, or fund a home renovation, a personal loan may come in handy. By becoming familiar with what a personal loan is, how it works, and the types of loans at your disposal, you can zero in on the ideal loan for your unique situation and goals.
Key Takeaways
A personal loan is money you borrow from a bank, credit union, or online lender to help pay for virtually any expense.
While secured personal loans are usually easier to get than unsecured loans, they require collateral that a lender can take if you fail to make your payments.
Since there are countless personal loans on the market, it’s a good idea to shop around and compare all your options.
What is a Personal Loan?
Typically offered by banks, credit unions, and online lenders, a personal loan gives you a lump sum of money upfront. Once you receive the funds, you repay them with interest through fixed monthly payments over a term of anywhere from a few months to several years.
Most personal loans are flexible, meaning you can put the funds towards any unexpected or planned expense. While each lender and loan is unique, they usually come with fast online applications, flexible terms, and fast funding.
Types of Personal Loans
In general, there are two types of personal loans: secured and unsecured. Here’s a breakdown of how they compare:
Secured personal loans
Secured personal loans are backed by collateral or an asset you own, such as your house, car, or savings account. If you don’t make your loan payments, the lender has the right to seize your collateral to recoup its losses. While a secured personal loan is typically easy to qualify for, it does require you to put something valuable on the line.
Unsecured personal loans
Unlike secured loans, unsecured personal loans don’t involve collateral. If you apply for one, the lender will consider your credit score and income to gauge how likely you are to pay back your loan. Since unsecured loans are riskier for lenders, they’re more difficult to get and often have higher interest rates. Though it is possible to lock in an unsecured loan with fair or bad credit, your options will be limited.
How to Qualify for a Personal Loan
Each personal loan lender has their own qualification criteria. However, most of them will consider these factors when you apply.
Credit score: Your credit score informs lenders how likely you are to pay back your loan. A higher score proves you’re a responsible borrower and often leads to lower interest rates.
Debt-to-income (DTI) ratio: Lenders pay attention to your DTI ratio because it explains how much of your income goes towards debt repayment. The lower your ratio, the better terms you may qualify for.
Income and employment: Whether you work for an employer, are self-employed, own a business, or depend on government benefits, lenders prefer a stable income history. You’ll need to prove this through documentation.
Loan amount: It’s typically easier to lock in favorable terms with a smaller personal loan, as it’s less risky for lenders than a larger one. You may have to agree to a higher rate if you borrow $50,000 instead of $5,000, for example.
In many cases, you can prequalify for a personal loan online with no impact to your credit score. This can give you an idea of potential rates and terms, making it easier to compare offers and find the right loan.
How to Apply for a Personal Loan
Once you do your research and find a personal loan that meets your needs, you can usually apply online. Most lenders require you to fill out a short form and share the following information:
Full name
Address, phone number, and email
Date of birth
Social Security number
Desired loan amount and intended use
Employment status and monthly income
Monthly housing cost
You may also be required to upload documents to confirm your identity and income, such as a driver’s license, passport, pay stubs, tax forms, and/or bank statements. While approval and funding times vary, many lenders offer same-day or next day decisions and disperse funds fairly quickly.
Who May Need a Personal Loan
A personal loan may be worth it if any of these situations apply to you.
You want to consolidate high-interest credit card debt: A personal loan can allow you to roll multiple high-interest debts into a single account, ideally with a lower interest rate than your current rates. This strategy can make the debt payoff process easier and potentially save you thousands on interest.
You’ve incurred an unexpected expense: If you have to cover a car repair, medical bill, or any other unforeseen expense, a personal loan might be useful. You can take care of a financial emergency without draining your savings.
You have a larger planned expense on the horizon: You may also put personal loan funds toward a kitchen renovation, roof replacement, wedding, or even vacation. It can be more affordable than using a credit card with a higher rate. Plus, you’ll likely get access to higher borrowing amounts.
You need money quickly: While some financial products require lengthy applications and long approval times, personal loans are usually quick and easy to get. If you can’t wait long for cash, a personal loan can be a real lifesaver.
by your friends at The Daily Navigator
