Personal loans, also known as consumer loans, describe a type of a versatile loan that can be used for any personal purpose. In most cases, you’re not obligated to tell your lender the reason you need to take out a personal loan, although some may ask for this information. Your lender can be a bank, a credit union, or an alternative agency.
When an unexpected financial hardship occurs, a personal loan may be a good way to resolve it. Personal loans are typically a fast and simple way to access some extra cash. There are multiple reasons people may decide to take out a personal loan, including:
- Planning a big purchase that can’t be covered by a salary.
- Debt consolidation.
- Paying for a big car repair.
- Covering moving expenses.
- Covering medical bills after an emergency.
Most people pay off installment loans in monthly installments. The principal, or the total amount of money that’s borrowed, is paid back in predetermined monthly amounts that include interest. The most predictable option is fixed interest because your monthly installment always stays the same, no matter what. A variable interest rate is riskier as it can increase and decrease based on the financial market.
The repayment period for a personal loan can be up to five years, and the interest rate depends on several factors, including the repayment period, your personal credit score, credit history, etc. The better your credit score, the lower the interest rate will be. However, it also depends on the loan offer.
Taking out a personal loan can also include certain fees. Many lenders charge an Origination fee, which refers to the cost of processing your loan application, and typically, this fee is no more than 6% of the total principal amount. A prepayment fee is charged if you pay off the principal before its due date. The lender needs to charge this fee to make up for the lost interest you would have paid. Also, if you’re late with an installment, a late fee will be charged.
As for the amount of money you can borrow when taking out a personal loan, your lender may have a limit—the maximum amount they’re willing to lend to any client, regardless of their creditworthiness. Without this limit, the maximum amount will depend on your credit score, your income, and your employment and financial history.
There are two different kinds of personal loans – secured and unsecured.
The type of loan that you’ll be approved for will depend on your financial history, your credit score, your income, and some other factors. If you have a good credit score, stable income, and no history of late or missed payments, your lender will probably consider you a creditworthy candidate and approve you for an unsecured loan.
However, you can also get approved for a secured loan even if you don’t have an exceptional credit score. For these types of loans, you will have to back them up with an asset called collateral. Your lender will feel more secure in the arrangement because they have the right to collect the collateral if you don’t keep up with your payments.