When you get a personal loan, you borrow money from a financial institution and pay it back over time, usually in monthly installments. Personal loans can vary in size, interest rate, and repayment schedule and can be used to cover a variety of needs. Let’s take a look at some of the best reasons people get a personal loan.
How does a Personal Loan Work?
Personal loans come from banks, credit unions, private lenders, and even the federal government. They are installment loans, which means that they are repaid through a series of regular payments. Installments for personal loans are usually due in a fixed monthly payment. In addition to a portion of the principal, these monthly payments include interest and any lender’s processing fees. If any of your monthly payments are late, you could be subject to late fees and penalties.
To get a personal loan, you need to fill out an application with the lender you choose. The lender will decide, based on their criteria, whether to approve or deny your application. If approved, the lender will give you the loan terms detailing the loan amount, repayment schedule, and the annual percentage rate (APR) of interest. If you accept the terms and sign the loan agreement, the lender will transfer the loan amount in a lump sum to your bank account within a few business days. The money is now yours to use as needed for your expenses.
Types of Loans
Personal loans can come in two forms—secured and unsecured.
Unsecured Personal Loan
An unsecured loan is a personal loan that doesn’t require the borrower to put up collateral. In that sense, the loan is backed by nothing but your creditworthiness. Most personal loans are unsecured loans. Student loans are an excellent example of an unsecured personal loan.
Secured Personal Loan
A secured loan is a personal loan backed by collateral from the borrower. That collateral can be a savings account or personal property. If the personal loan is repaid, the lender can take ownership of the collateral to cover their losses. The collateral lowers the lender’s risk, so secured loans carry lower interest than unsecured loans. Examples of secured loans include mortgages and car loans.
Personal Loan Interest Rates
Personal loans come with interest—the percentage of the loan amount that the lender charges for the loan. In addition to other fees, the loan’s interest rolls into the monthly payment.
A personal loan can have fixed interest rates or variable interest rates. Fixed interest loans carry the same interest rates over the life of the personal loan. With a fixed interest rate, you can count on fixed monthly payments. On the other hand, variable interest loans have interest rates that fluctuate according to the present market conditions. That means that your monthly payment will likely change over time. Variable interest rate loans will typically have lower APRs than loans with fixed interest rates. These facts make variable interest ideal for a short-term personal loan and fixed interest better for a personal loan that you will need to pay off over a more extended period.
What is a Credit Score?
Your credit score is one of the most important factors determining if you are approved or denied a personal loan. Your credit score is a rating of your overall creditworthiness–that is, your history of borrowing money and repaying it.
Where Does Your Credit Score Come From?
Credit scores are a part of your credit report, which contains information about your payment history, credit usage, and the age and type of your credit accounts. Data collection agencies create these credit reports called credit bureaus. When you open a new account or are late on a payment, your creditor reports this information to the credit bureaus. The credit score algorithm takes all your financial behavior into account and creates a three-digit score:
- 300–499 Very Poor Credit
- 500–600 Poor Credit
- 601–660 Fair Credit
- 661–780 Good Credit
- 781–850 Excellent Credit
What Credit Score do You Need to Get a Personal Loan?
Getting approved for a personal loan depends on where you shop. Requirements vary from lender to lender, so the best strategy is to explore your options before settling on a lender.
Borrowers with a score below 600 may struggle to get a personal loan, so the best idea is to pay off things like credit card debt before applying for one. If you do have less-than-perfect credit, there are bad credit loan options available. If managed well with on-time monthly payments, bad credit loans can be great tools to help you rebuild your credit.
Uses for a Personal Loan
Here are some of the most popular reasons to get a personal loan:
Debt consolidation loans are personal loans used to pay off multiple debts and other loans. When you consolidate debt, you don’t have to keep up with a bunch of monthly payments. Instead, you can make a single payment. Debt consolidation loans have lower interest than most credit card APRs, making them an ideal option for handling high-interest credit card debt, medical bills, and student loans.
Payday Loan Alternative
Payday loans are best known for their quick applications, approvals & payments. They don’t require a credit check. The affordability of payday loans also makes them attractive to borrowers with bad or no credit history. However, payday loans are high-risk, high-interest loans with tight loan terms. In many cases, payday loans online must be repaid within 2-4 weeks and have an average APR of about 400%.
With an average APR of about 40%, personal loans can be repaid over months or years, making them safer and more manageable.
Homeowners can take out home equity loans to make those long-awaited improvements. A home equity loan is a personal loan that uses your house as collateral. That means that if you fall behind on repayments, you could lose ownership.
If you don’t want to take that financial risk, a personal loan may be a better option. In addition to not needing collateral, a personal loan may be easier and faster to obtain.
A big move to a new city or state is a major expense. From moving out of your old place to furnishing your new one, moving costs can add up. Instead of using savings or credit cards, a personal loan can be an alternative funding source. Getting a personal loan can help you bundle standard moving costs like security deposits and first/last month’s rent into an account that you can repay over time. With access to a personal loan, you don’t have to spend time-saving money to relocate.
Emergency costs like medical issues or car repairs can break your budget. Online direct deposit loans can be approved in minutes if you don’t have extra cash on hand.
And if you aren’t building an emergency fund, get started today!
Unfortunately, it’s common for our ovens and washing machines to break before we have enough saved up to buy their replacements. A personal loan can help you make these big purchases happen fast so that you don’t spend even more money on takeout or at the laundromat.
A personal loan can be used to purchase a car without having to take out an auto loan. As a secured loan, auto loans use the car as collateral. If you don’t want to risk losing the car if you fall behind on payments, a personal loan is your best bet. Additionally, buying a car with a personal loan means that you own the car’s title immediately. With traditional auto loans, the lender technically owns the car until you pay off the loan.
Saving for your dream wedding—or creating one on a budget—is always the best way to go. But if you need a way to finance your nuptials, consider a personal loan instead of charging your way down the aisle with credit cards. Again, interest for a personal loan will most likely be lower, so you’ll save money repaying a loan over your credit card bills.
Sometimes, you just need a vacation. And you need it NOW! A personal loan may not be the best option for a weekend getaway, but it could be just the thing to finance that honeymoon cruise or anniversary trip around the world!
Personal loans can help you solve many financial problems. However, if you don’t manage them well, personal loans can become problems themselves. Before you apply for a personal loan, do your homework. Borrowing money is a big deal; the personal loan you take today will be with you for a while. Shop around and compare interest rates and monthly payments—with the proper planning, you can find a personal loan option that can quickly save money and get you out of debt.