A personal loan is the amount of money you borrow from a credit union, bank, or online lender to pay back over time in fixed monthly payments or installments. Most personal loans are unsecured. This means no collateral is needed to qualify you for this type of loan. Before lenders give an unsecured personal loan, they must consider some factors such as credit score, credit history, and free cash flow. You can still be offered a co-signed loan if you are not eligible for an unsecured personal loan. Secured personal loans are secured by your assets like a car or a house to enable the lender to repossess if you default. Co-signed personal loans also include guarantors with a strong credit profile; they are responsible for defaulted or missed payments.
You should evaluate a personal loan by checking the loan’s annual percentage rate (APR). APR is the total borrowing cost, including interest and any fees. If you repay personal loans on time, your credit score improves, but late payments damage your score when reported to the credit bureaus by your lender. Personal loans are reliable loans that can be used in various ways depending on your needs. For example, you can use a personal loan to cover:
- Medical bills
- Wedding expenses
- Funeral costs
- Moving expenses
- Debt consolidation
- Home renovation
- Unexpected expenses
Repayment of a personal loan is different from repayment of a credit card debt. You will pay fixed monthly installments with a personal loan over a given period until the loan is fully paid. You should know the following terms before applying for a personal loan:
- Principal-this is the total amount you apply. For instance, if you apply for $12,000, then that is the principal amount. The lender calculates interest based on the principal amount you owe them. The principal reduces as you continue to repay your loan.
- Term– the duration you take to repay a loan is called a term. When the lender approves your loan, they must inform you of the duration you should take to clear the loan.
- Interest– when taking a personal loan, you usually sign an agreement that includes the debt with interest. Typically, it is the fee charged to borrowers by lenders for allowing them to use their money. You will pay a monthly interest together with the monthly installments meant to reduce the principal.
- APR- this is the annual percentage rate, typically loan fees charged by lenders when you take a loan. APR incorporates both your interest rate and other fees to give you the loan’s actual cost. It is good to compare APRs of different lenders to determine the affordability of different personal loans.
- Monthly payment- this is the amount you should pay monthly to the lender during the loan term. This amount consists of a portion meant for paying down the principal, and that portion meant for the total interest.
How to Apply for a Personal Loan
Generally, you apply for a personal loan online or visit the lending institution in person. Although the application process varies with different lenders, it is crucial to note the following steps when applying for a personal loan:
- Check your credit score. Every lender will rely on your credit history and score to determine your eligibility for a personal loan. You can check your credit score through your credit card issuer. This will help you anticipate the likelihood of your personal loan approval and gives you a clue on the kind of interest to expect.
- Improve your credit score if necessary. Checking your credit score will also tell you if you need to improve your creditworthiness before applying for a personal loan. You can reduce your credit usage rate and make other improvements based on your credit report.
- Decide on the amount to borrow. Once you have enough information about your credit score, determine the amount you want to borrow.
- Look for the best terms and interest rates. Many lenders offer an online prequalification process that allows you to estimate your interest rates. This means you can shop around and get the most favorable loan terms.
- Submit a formal application. After establishing the most favorable personal loan option, submit a formal application. The processing time depends on the lending institution.
A personal loan can be good for you, depending on how wisely you manage your borrowing. It can help you purchase expensive assets. Breaking that large expense into installments can make it more manageable if you have a stable income.