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Personal Loans: A Step-By-Step Guide

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In plain language, a personal loan is a cash advance borrowed either from a bank or an online lender you need to pay back in equated monthly installments (EMI). However, in traditional finance, personal loans are known as short to medium-term repayment alternatives to achieve financial goals, whether you're seeking to consolidate high-interest debt, establish a business, or pay for an emergency. 

A personal loan might be pretty costly compared to other forms of financing, and it may not be the right choice in every scenario. Here are some things to consider before shopping around for a personal loan.

What is a personal loan used for?

Personal loans, also known as signature loans and debt consolidation loans, provide more freedom regarding money's usage purpose. Personal loans almost always come in the unsecured form of lending, meaning you won't have to back up your loan with any collateral. On the other hand, a secured loan requires mandatory collateral to ensure that a borrower will keep up with his contractual obligations, thus making on-time payments. Personal loans may come with fixed or real interest rate and payback periods ranging from a couple of months to ten years (though some can be extended). 

However, keep in mind that certain lenders may impose limitations on how you might utilize your funds. Some states, for example, may make it illegal to spend money on education. Therefore, make sure you can use a personal loan for your intended purpose by checking with the lender ahead of time.

When is a personal loan a good idea?

While a personal loan may be used for almost anything, it doesn't mean it's always a good idea. In general, taking out a personal loan to enhance your financial state or supply essential finances is an excellent option. Here are several common examples:

Debt Consolidation: Combining multiple loans into a single monthly bill (like high-interest credit card debts) is always a good idea. A personal loan can give a set payback period to help keep track of your finances even if you don't plan to save money on a low-interest personal loan. 

Home Renovation: If you are looking for a home renovation loan, opting for a personal loan can be a much better option than a home equity loan or HELOC since these loans require mandatory collateral. Consequently, you risk losing your assets if you default on a loan. 

Emergencies: Ideally, you'd have enough money saved for unexpected costs. However, life isn't always perfect, and if you quit your job, your car requires a quick repair, or a household item has to be fixed, a personal loan might help you relax when cash-strapped. 

Major Life Events: Weddings, divorces, or funerals may be costly, but it's not always easy to save money for such significant life events. A personal loan might help you get the money you need at the right moment in financially tough situations. 

What to consider when thinking of getting a personal loan? 

Before securing a personal loan, do your research and evaluate opportunities to get the best offer possible. Even if your bank or a local credit union offers you a good deal, don't rush to accept it since you might be able to get a better bargain somewhere else. What to pay close attention to when you take a loan: 

Interest rate: The cost of a loan is mainly reflected in the interest rate. According to, on average, the personal loan rates vary 9.4 percent, but depending on your credit and financial position, your rate proposals may be greater or lower.

Loan Term: Consider credit repayment terms as they affect your minimum monthly payment. In fact, the longer your credit repayment plan, the smaller your monthly payment. However, you may save more money on interest with a short repayment schedule. 

Fees: Besides interest rates, lenders may impose additional fees, boosting the annual percentage rate (APR) of your loan. For example, origination costs are withheld from the principal amount. Also, lenders may impose late and early-payment penalties if you fall behind on your payment or decide to repay your debt earlier. 

Financing Time: Many creditors provide same-day financing, while others may take a couple of days to transfer cash into your bank account. Consider these time frames depending on how quickly you want funds. 

Before you submit your loan request, many personal loan lenders may offer to prequalify you with a rate quote. This procedure usually entails a soft credit pull, which has no impact on your credit score. This method allows you to evaluate loan possibilities side by side and choose the one that best suits your needs. 

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