Simply put, a personal loan is a loan you take out for your personal expenses. They may involve medical costs, a big purchase, or even vehicle repairs. Any loan used for personal reasons would be considered a personal loan, as opposed to one used for business or commercial purposes.
Personal loans, also called consumer loans, can be taken out from a bank, credit union, or an online lender. To take out a personal loan, you need to meet certain criteria. The lender will usually take a look at your employment history, your financial history, your income, and your credit score. Having a better credit score will mean better loan offers, with more favorable interest rates and terms.
This is how you can be eligible for an unsecured loan. An unsecured loan means you don’t need a co-signer or collateral to get the loan. Your financial history tells the lender whether you’re a creditworthy individual.
If you’ve had financial hardships in the past or your employment isn’t stable, you still might be able to get a secured loan, which means you’ll be required to offer up an asset as collateral. It can be something valuable you own, but make sure you pay off the debt in time. If you don’t, the collateral will belong to your lender to make up for the money you didn’t pay back.
If your employment is steady and your credit score is good, but you can’t get the amount of money you need because of low income, there’s a solution. You can apply for the loan with a spouse or family member. Spouses frequently apply jointly to get a larger sum.
How much money you can borrow mostly depends on your income and your credit score. Usually, the lender won’t allow you to have an amount that’s more than 50% of your monthly income. Sometimes lenders even have their own limits, unrelated to your credit score and salary. For example, you can’t borrow more than $20,000 from some lenders, regardless of your excellent income and a high credit score.
Interest rates on personal loans are typically fixed. This means they stay the same during the whole period of loan repayment. A variable interest rate has certain benefits because your monthly payment can be lower from time to time, but it’s unpredictable. It can also increase dramatically and make it impossible for you to keep up with your repayment schedule.
The interest rate at which you’ll pay off your loan depends on multiple factors: loan amount, the period of repayment, your credit score, and the lender.
Making timely payments on a loan can increase your credit score if the lender reports those payments to the credit bureaus. On the flip side, if you don’t make payments on time your credit score will likely start to drop.