You can do many things if you find that you are short on money or have a large expense that your budget will not cover. One of the most widely recommended options that you can utilize is to take out a personal loan with a bank, credit union or trusted money lender. While not everyone is eligible for these kinds of loans, those that are eligible often find that they have a lot of freedom to use this financial aid to achieve their goals.
By learning the proper ways to use personal loans to your advantage, you can go into the process with a plan and efficiently execute it without breaking the bank.
What is a personal loan?
You should get a personal loan if you need help paying for a specific good, service or other expense. They are fast and easy to use, but not necessarily quite as easy to qualify for. The reasons for this are many – they are usually very low-risk for the consumer, but have a higher risk factor for lenders. Additionally, personal loans have a great deal of flexibility, as they can be used on a variety of different products and services.
You can use a personal loan on a single source of debt, which can range from buying a housing renovation to buying a boat, and it can even be used on medical or other types of debts. Most personal loans require you to inform the lender what you are planning to do with them, but beyond that, they can be some of the most versatile loan options on the market.
Personal Loans vs. Other Loan Types
Personal loans are quite like many other types of loans, but they do have some unique characteristics. Besides being perhaps your most flexible lending option, personal loans are also:
- Unsecured. While this may sound like a negative term, being unsecured is actually ideal if you are the person taking out a loan. This simply means that you will not need to put up any sort of collateral in order to receive your loan, such as your house, your car or any other valuable asset. Most other loans, such as mortgages or business loans, are secured (and therefore do require collateral). While a personal lender can always take action to ensure that you pay your debt, your personal belongings are safe from forfeiture.
- Fixed. Predictability is an excellent feature of any financial program, and personal loans have a strong level of just that. Fixed interest rates, which are present in most personal loans, mean that whatever amount of interest that you will need to pay on your loan every month stays the same from the beginning of the loan to the day that it is finally paid off. Your credit score will determine this annual percentage rate (APR), and you will often not have to worry about any fluctuations. Other loans, like lines of credit, can often have variable APRs based on how long you have had access to the loan. However, keep in mind that the amounts of personal loans are usually also fixed – even if you have great income, credit and debt history, you may only be able to borrow a certain amount at a time from any particular agency. Personal loans also have fix lending amounts, although this amount can vary based on a wide variety of factors.
- Convenient. If you are an individual that has garnered a lot of debt from other sources, personal loans may be incredibly useful as a way to consolidate that debt. If you can get a good enough APR, you can use your personal loan to pay back all of your credit card debt and other types of loans in order to have one single source of debt that you need to worry about. This can be a convenient way to stop worrying about potentially predatory credit card rates, and pay just one debt-related bill per month. Or, if you so choose, you can use your loan to purchase a good or service that you have always wanted – unlike other loans, personal loans can have the most customizable options to fit your needs.
What are the risks of taking a personal loan?
Although they have many benefits, it is certainly possible to misuse or misunderstand personal loans and their fees. While loans such as credit cards can be paid off indefinitely (or, as long as you decide to use the credit card), personal loans have a set amount of time that you must pay them off by. If you do not, banks and lenders can hire a collection agency or even file a lawsuit against you, since they are unable to seize any of your personal belongings such as your car or house.
There are also personal loan scammers out there, who will often attempt to collect preliminary fees before vanishing without providing you a loan. Try to take extra precautions against this, and only trust your money with accredited banks, local credit unions and respected online lenders.
And finally, even legitimate money lenders can have unsavory business practices. The primary goal of a personal lender is to make money on interest – however, some organizations can try to get greedy with so-called “origination” fees. Most personal loans will require an up-front fee of less than 2 percent of your loan, but if your loan has an origination fee of over this percentage, you might consider looking for a better deal. Keeping your fees and interest rates as low as possible is crucial to getting the most out of your personal loan.
How to Apply for a Personal Loan
Once you have established that a personal loan is right for you, it is almost time to go through the application process. But before you begin to work on your application, it can be very wise to prepare the following documents and pieces of information ahead of time:
- Your annual household income.
- W-2 information regarding your employer(s) and how long you have worked there.
- How much debt you currently possess from other lenders.
- The cost of your rent, mortgage or other costs of living.
Then, you can present this information to the bank, credit union or money lender of your choice. It is crucial to compare all of your possible options – while some lenders may offer nice rewards and other perks, perhaps the most significant features to look for are the right amount of loan money that you need, and a low APR so that you can avoid needless interest costs. It usually takes roughly one week after you apply to receive your loan benefits – however, depending on your credentials and determined level of need, you may be able to receive said benefits as soon as the day after your application is submitted.