A personal loan can be used to pay for just about anything. More than wanting to know what your plans are when you receive the money, your lender may want to know whether you have the ability to pay it back. Although personal loans are not known for being inexpensive, they can be true lifesavers in many circumstances. Read on to learn more about personal loans and decide whether one may be right for you.
What Types of Personal Loans Can I Get?
There are several different types of personal loans available today, each with its own payment requirements and interest rates. You may be able to obtain an emergency loan if you are facing an unexpected sudden event. Payday loans, which should be repaid by your next pay period, generally require no credit check and are very easy to get.
Bad credit or no credit check loans are an interesting option when your credit score is low and you have not been successful in getting a loan anywhere else. These loans are also easy to get after meeting minimum requirements and are offered for a specific time period.
How Do Personal Loans Work?
In some cases, as with a mortgage, you know that the funds are earmarked to purchase a home or other type of property. Other loans also have a specific reason why they are needed, like when buying a car. In both cases, the property or the vehicle serves as collateral for the loan. As opposed to these loans, in many cases, personal loans have no collateral.
By not having anything that could be seized if you fail to make the required payments, the lender is taking a greater risk in loaning you this money. That is why personal loans are generally associated with higher interest rates.
Several factors will play a role in how much interest you will be charged for a personal loan. These can be:
- Your credit scores
- Your debt-to-income ratio
- Your employment status
- The purpose of the loan
- The amount of the loan you are seeking
- The repayment terms
Can Collateral Secure Personal Loans?
Yes. In some cases, your lender may request collateral items such as your bank account, car, or other personal property. If you can qualify for a secured loan, you may get a lower interest rate than you would with an unsecured one. Of course, you have to keep in mind that you may lose whatever was used as collateral if you fail to make the payments. Also, in either type of these loan, failing to keep up with your payments will have an impact on your credit score. Anything that affects your credit scores will also mean consequences in the future when you might be applying for a mortgage or any other loan.
Should you consider a personal loan?
You should always look at all your available financing options before opting for a personal loan, simply to give yourself the opportunity to compare what financial products are available and which one offers you the most attractive terms. You may want to select a personal loan in cases such as:
- When you know, you will not qualify or do not have a lower-interest credit card.
- When you have a credit card, the credit limit on it will not serve your current personal borrowing needs.
- When you have done some comparison shopping and this is your least expensive option.
- When you do not have any collateral available to offer
- When you need the funds for a short and well-defined time period, the terms of personal loans run between 12 and 60 months.
Under What Circumstances Would a Personal Loan Make Sense?
There are a variety of circumstances that would point toward a personal loan being your best choice. Here are some examples:
You Want to Consolidate Your Credit Card Debt
In cases where your credit card debt on one or more cards is substantial, a personal loan will allow you to pay off those debts. If you do your homework to find the perfect loan, you can end up paying off all your credit card debt at once and get a single loan with a lower interest rate. Compare this option with the possibility of transferring the balance to a new credit card with lower interest rates and see what makes the most sense to you.
You Have Another, More Expensive Loan
It is well known that personal loans carry high-interest rates. However, they are not the highest ones. Payday loans, although quite popular, usually carry higher interest rates than personal loans. You may also have an older personal loan with a higher interest rate than the one you are being offered now. Study the terms of this new loan to verify the lower interest rate as well as whether there are any prepayment penalties, for example.
You Have an Upcoming Major Life Event
If you are getting married, planning a big anniversary celebration, graduation, or any other important life event, you may want to compare whether it would be less expensive to finance your event through a personal loan rather than charging everything on your credit card.
You Are Looking to Improve Your Credit Score
If you have a short credit history and are trying to build it up, getting a personal loan and making all the monthly payments in a timely manner should help improve it. Particularly if all that shows up in your credit report is credit card debt. Still, don’t commit to a personal loan just to move your credit scores up. Wait until you have a good reason to take out a personal loan.
Life is unpredictable, and you may find yourself looking for financing for a wide variety of reasons. Fortunately, there are many loan options available, and one of them should certainly meet your needs. Compare your options and decide which one will work best for you.
