Personal loans are an important financial tool that can provide you with a helping hand in difficult economic conditions. There are several purposes people consider availing personal loans. Some of these include consolidating debt, covering unexpected expenses, and managing an emergency.
If you are in need of a short-term loan but don’t know how to approach applying for a personal loan, we are here to help. In this guide, we will help you understand the basics of personal loans, how they work, and what are the things you will need to consider when taking this financial step.
Keep reading to find useful insights.
What Are Personal Loans?
A personal loan is a fixed amount of money borrowed from a financial institution, such as a bank or online lender. This type of loan has a predetermined repayment period. Unlike specific-purpose loans like auto or home loans, personal loans have flexibility and allow borrowers to use the funds for multiple needs.
These needs include debt consolidation, home improvements, medical expenses, or even a vacation. Due to its flexibility and predetermined repayment period, a personal loan is considered the best choice for most people, even those with a bad credit score. You can learn more about this type of personal loan at Lantern by SoFi.
Types of Personal Loans
There are multiple personal loans depending on your financial situation and specific needs. Let’s read about some of them here:
1. Secured Personal Loans
Secured loans are backed by collateral, such as a car or savings account. These loans have low interest rates, but there is a great risk of losing the collateral if you fail to repay. This is the reason most people fear approaching secured personal loans.
1. Unsecured Personal Loans
These loans don’t require any collateral, making them accessible to a wider range of borrowers. However, interest rates may be higher since the lender takes on more risk in lending you the money without having any collateral from your side.
2. Fixed-Rate and Variable-Rate Loans
With fixed-rate loans, the interest rate remains constant throughout the loan term. This provides predictability. Variable-rate loans, on the other hand, can fluctuate based on market conditions. These fluctuations can affect your monthly payments.
How Do Personal Loans Work?
The application process for personal loans is quite similar to any other type of loan. First, you go to the lender, and they assess your creditworthiness by checking your credit score. Borrowers with good credit scores are likely to get approved more quickly.
After checking your credit score, the lender will ask you about your income to ensure you have the means to repay the loan. They will also check your employment history and stability to understand how much they can lend you.
By checking these things, the lender will approve or disapprove you for the personal loan. If approved, you’ll receive a loan agreement. This agreement will include terms such as the loan amount, interest rate, repayment schedule, and any applicable fees. Review this document carefully before accepting.
When you have taken out the loan, you will need to repay it through fixed monthly installments. The duration of the repayment will decide how much you will have to pay in terms of interest.
Considerations Before Taking a Personal Loan
There are some things you will need to consider when availing personal loans. First of all, be sure to clearly define why you need the loan, whether it’s for a specific expense or to consolidate debt. After this, you will need to determine the amount you need and choose a repayment term that aligns with your financial goals and repayment abilities.
Go to multiple lenders and ask about their interest rates and fees to ensure you’re getting the most favorable terms.