Personal Loan: What Is It & How Can It Be Used?
We could all use a little help with our money sometimes, whether it’s to save up for a wedding, fix a roof that’s leaking, or pay off high-interest debt. Just a few examples are listed above. You might be able to do that with the help of a personal loan. In some situations, a personal loan might be the best choice because it gives you more freedom than a mortgage or an auto loan. Before you start looking at other ways to borrow money, you should know how to get a personal loan.
What Is a Personal Loan?
PaydayChampion – what is a personal loan? A personal loan is a one-time payment that can be used for almost anything, like consolidating credit card debt, paying off debt from unpaid medical bills, or making improvements to your home. A personal loan is paid back in a set number of monthly payments at a set interest rate over a set amount of time.
At the moment, the average APR for a personal loan can be anywhere from 10% to 28%. The amount of time you have to make payments is usually between one and seven years. Rates, terms, and eligibility requirements for personal loans depend on a number of things, such as the borrower’s credit score and payment history, the borrower’s ability to pay back the loan, and the lender.
How to Apply for a Personal Loan
If you take the time to follow these simple steps, you might be able to get the money you need to move forward in just a few business days.
1. Look over your credit history very carefully.
If you want to get the best personal loan offer, there is; you need to have great credit. So, before you start the process of applying for a personal loan, you should look at your credit report. Every year, you can get a free credit report from each of the three biggest credit agencies (Equifax, TransUnion, and Experian). Lenders will look at your report, so if you find any mistakes, you should contact the credit bureau so that they can be fixed in your file.
2. Figure out how much you will charge.
Before you apply for a personal loan, you should look online to find the best interest rate (and a hard pull of your credit report). You can usually put your information into an online loan application to get personalized loan offers that show the interest rate and monthly payment amount you will be expected to pay back.
Check to see if your credit report will be pulled hard or soft when you apply for a personal loan. It’s possible that a hard inquiry will drop your credit score for a short time (which can affect your ability to get a loan from other financial institutions you apply to after). A small draw, on the other hand, won’t change your credit report in any way.
3. Choose a place to borrow money from.
Before you sign a contract with a lender, make sure you’ve read all the small print and understand all of the loan terms. For example, the annual percentage rate (APR) could be higher than the interest rate. If this is the case, the annual payments would be higher than what would be expected from the interest rate. If you get a personal loan that has an origination fee, that amount could come out of the money you get back from the loan. So, you should make sure that the total loan amount you ask for is enough to cover not only your needs but also any costs associated with getting the loan. If you want to pay off your loan early, you should ask the lender if there is a penalty for doing so.
Think about what it was like to borrow money in the past. If, for example, a lender lets you set up automatic loan payments, you can improve your credit score by always making your payments on time. If a lender doesn’t let you pay your loan automatically, you can still get a good deal if you pay on time. On top of that, giving customers great service has a big effect. Choose a lender who can talk to you on the phone or through live chat at times that work for you.
Kinds of Personal Loans: Unsecured Vs. Secured Loans
Depending on what the lender wants, most personal loans are either unsecured or secured. Here is a list of the most common changes:
Personal loans that don’t need collateral other than the borrower’s signature are often called “signature loans.” Lenders decide whether to give unsecured loans based on the borrower’s creditworthiness or how likely it is that the loan will be paid back. Lenders look at your income, credit history, and credit score to decide whether or not to give you a loan. Unsecured loans include credit card debt, school loans, personal loans, and personal lines of credit.
To get a secured loan, you need to put up collateral, which is usually a valuable item like a house, car, or boat. If you can’t pay back the loan according to the terms, the lender has the right to the collateral, and you will have to give it back to them. Mortgages, car loans, and lines of credit backed by the value of a home are all types of secured loans (HELOC).
What can a personal loan be used for?
Most of the time, you can use a personal loan for almost anything, such as the following:
Loans for consolidating debt
With the help of a personal loan, you’ll be able to combine your debt from multiple credit cards with high (and often changing) interest rates into one payment that’s easier to handle. The interest rates on personal loans are often lower than those on credit cards. This can save you a lot of money over the course of the loan’s term. Some banks and credit unions also offer personal loans with balance transfers. With these loans, the lender can send the money directly to the borrower’s creditors, which speeds up the process of consolidating debt.
Home maintenance and improvement projects
In contrast to a home equity loan or home equity line of credit, a home renovation personal loan lets you avoid the risk of using your property as collateral for a loan in order to make repairs or renovations. This is because the home itself backs the loan. You can use a personal loan for almost anything, from a small expense like fixing your water heater to a much bigger one like getting married (like finally replacing those Formica countertops in your kitchen).
When it comes to credit cards, interest rates that are way too high can quickly add up to a lot of money. It’s not a good idea to use them to buy really expensive things that won’t (or can’t be) paid off in a month or two because that’s not the best way to use their abilities. Personal loans have a fixed interest rate that is, on average, lower than that of other types of loans. This means that they can be a great way to pay for big life events and expenses, like having a baby or getting married.
Making restitution to family and close friends
When people borrow money, it can sometimes cause trouble in the family. Instead of borrowing or lending money from people you know, you can get a personal loan and avoid the financial and emotional costs that come with it. You can also get a personal loan to pay off a family loan and feel better about being able to take care of your family.
Health insurance might not cover all dental care, elective surgeries, and injuries that were not planned for. Also, unpaid medical bills are often sent to collection agencies, which can hurt your credit score. A study done by the Consumer Financial Protection Bureau found that at least 43 million people in the United States have medical debt that shows up on their credit reports. One can get a personal loan ahead of time to pay for medical bills and avoid headaches, or one can get a personal loan later to pay off medical debt.
Urgent and important financial responsibilities
Even if you have saved a lot of money in an emergency fund, it is possible that a disaster will cost you more than you have saved. If your car breaks down, your pet gets sick, or your hot water heater needs to be replaced right away, you can use the money from a personal loan to fix the problem and get back on track without having to take money out of your savings account.
Can I improve my credit score with a personal loan?
Each month, different lenders send the three major credit bureaus reports about how borrowers use loans, including information about personal loans. When used to pay off credit card debt, personal loans can help you build a good payment history, add to a healthy mix of credit, and maybe even lower your credit utilization ratio. You won’t get these benefits until the credit card debt is paid off. Depending on how you handle the money you borrow from the lender, a personal loan can either help or hurt your credit.
Should I take out a personal loan?
If you use it right, a personal loan can be a great way to maintain or improve your current financial situation. You can either make a big investment or use the money to take care of something you need right away. Consolidating your credit card balances into a personal loan can help you save money and get your finances in order if you have balances on cards with high-interest rates and promise to keep your balances low in the future. If you have balances on cards with higher interest rates, getting a personal loan to pay off your revolving credit card debt can help.
What do I need to do to get a personal loan?
Lenders would want to see borrowers with steady incomes, a track record of making payments on time, and a low ratio of debt to income. A score of at least 740 points is thought to be “very good.” If your credit score is in that range, your application for a personal loan has a good chance of being approved. When you apply for a loan with a cosigner, as long as they have good credit themselves, it can help you get a better interest rate, a bigger loan amount, or both.