Consumers have the ease to borrow money for satisfying personal as well as business needs. This loaned out money has to be returned with some costs e.g. interest rates. In the past, there had been only two to three categories of such loans.
Today, however, lenders have a menu with products from home loans to car loans, and student loans to small business loans. The terms and facilities of each kind of loan are designed keeping the client’s needs in consideration.
Myriad personal loan options are available in the market whether you want to finance a vacation, do home repairs, or pay your bills, etc. Where getting approved for a personal loan would fulfill your needs, it may damage your credit report and financial health if dealt with irresponsibly.
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So, it is wise to brainstorm the following aspects to make a wise borrowing decision:
- Personal income
- Assets you own
- Monthly expenditures
- Financial goals
- Why get a loan?
Personal Loans
To feed your financial needs, you may consider tapping into personal savings. If either they are not enough or you don’t need to empty your savings all at one, credit cards and personal loans facility is available.
Both have interests associated with them and both adversely affect your credit rating and credit report due to missed payments.
Unlike credit cards, personal loans would suit you if you want the whole amount all at once and accept repaying in monthly installments (borrowed plus interest).
- Are personal loans good or bad?
It depends! Personal loans work best if you have a clear financial strategy to stick to and you are sure to return in time. On the other hand, it can be disastrous in the following cases:
- Possible Purposes of Personal Loans
The repayment duration for a personal loan generally revolves from around 12 months to 60 months. Common purposes behind applying for personal loans are generally:
- Home renovation
- Wedding expenses
- Home repair
- Emergencies e.g. medical treatments of diseases
Personal Loan Types
The most suitable personal loan type is the one whose interest rate, terms, repayment duration, and credit score requirement are relevant to you!
Following are some common personal loan types:
- Co-sign loans
- Variable/ Adjustable Rate Loans
- Nil Credit Check Loans | Bad Credit Loans
- Unsecured Personal Loans
- Debt Consolidation Loans
- Fixed Rate Loans
- Emergency Loans
- Secured Personal Loans
Co-sign Loans
If you have a bad credit score, getting a personal loan could be very difficult. Plus, even if you qualify, this loan would be quite expensive and you would be in a non-negotiable condition.
However, in Co-signed loans, a co-signer is legally obligated to repay on behalf of the borrower if he/ she defaults. This gives the lending party security of repayment and the borrower gets better terms and interest rates.
- The co-signer’s credit report is affected in case you don’t make timely payments.
Variable/ Adjustable Rate Loans
Also referred to as a float rate loan, the interest rates start lower than fixed-rate loans but are subject to change if the bank’s interest rate benchmark changes.
Financial indexes may sway higher than expected in variable-rate loans – which is why they are less preferred than fixed-rate loans.
- The caps on interest rate increase can be as high as 25%.
They may be favorable for people who have taken a short-term loan and would be repaid in a couple of months. Because interest rates rarely change drastically within months.
Nil Credit Check Loans | Bad Credit Loans
As the name shows, these loan types are specifically made for people facing credit score hard lucks. You are approved for loans but with very high annual percentage rates.
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So, if you consider taking one, ensure your monthly cash inflows allow you to afford monthly repayments of no credit check loans and bad credit loans.
Unsecured Personal Loans
It is known as unsecured because it involves zero collateral as a security for repayment to the lender. You can qualify for an unsecured loan if you have an excellent credit report and a good credit score.
The repayment duration is usually between one and six years.
Debt Consolidation Loans
If you’ve taken multiple debts, a debt consolidation personal loan allows you to consolidate them all and repay them as one monthly payment at a time. It minimizes the chance of missing any debt payment in such a case.
Weigh these pros and cons before opting for a debt consolidation loan:
| Pros of DC Loans | Cons of DC Loans |
| There can be a lot of mess and stress while dealing with multiple debt repayments every month. This loan consolidates them into one monthly payment. | Missed payments of such loans can wreck your score. |
| Due to their shorter durations, you end up repaying fast. | Some underlying costs of such loans can be:
|
| When multiple debts consolidate, your interest is typically lower – your credit score is a determining factor of this cushion. | A bad credit score is proportional to high interests on such loans. |
| Repaying the consolidated debts improves your credit report. |
Fixed-Rate Loans
In variable rate loans, interest rates may vary and an uncertainty factor is involved. In fixed-rate loans, the borrower knows the interest rate and monthly payment amount exactly. This way he/ she can budget and has a clear picture of how much he/ she has to pay in monthly installment and how much he/ she would be able to set aside for other tasks.
Emergency Loans
They are applicable in emergencies like:
- Medical expenses
- Vehicle maintenance e.g. in case of a car accident
- Insurance payments
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The loan amounts are released in a day or two after approval of the emergency loan application. The amounts can be higher than one thousand dollars.
Interest rates and qualifying amount depends on factors like credit score, monthly income, etc.
LendingClub, Rocket Loans, and PenFed Credit Union are some of the best emergency loan options these days.
Secured Personal Loans
It is backed up by collateral like the vehicle, home, and savings, etc. This security is seized by the lending party if you don’t repay in time.
The interest rates are lower than unsecured personal loans. Lenders play it easier on the credit score factor due to the security involved.
Other Financing Alternatives
- Payday Loans
- Small Business Loans
- Credit Cards
- Pawnshop Loan
- Line of Credit
- Savings
Payday Loans
These are short-term loans. Interest rates and accompanying charges can be very high. These unsecured loans are asked to be repaid on the next payday, unlike the above-stated monthly installments.
The loan amounts are very minimal and they don’t typically require a very good credit score.
Small Business Loans
- Personal loan debt touched the $320 billion mark in 2020.
Specifically designed for small businesses, these loans help in:
- You can buy new equipment through equipment financing and also upgrade old gear.
- Your business builds a credit history to qualify for future financing.
- If your cash flows are facing issues, these loans can make them stable.
- If you own a seasonal business (e.g. relevant to Christmas), these loans can cover costs in non-seasonal times.
Credit Cards
There is no fixed monthly payment as other loans, but a minimum amount you are obliged to clear. It is a convenient financing method with the following advantages and drawbacks:
Pawnshop Loan
You get a loan in exchange for a valuable asset (jewelry etc.). You will get this asset back when you return the loan amount. The loan amount is typically small than other loan types and loan compensation duration is small. Interest rates are also higher.
In case of default, the pawnbroker sells the asset to recover your debt. This financing source does not affect your credit report.
Line of Credit
Also called revolving credit, the borrower has a credit limit and pays off the interest on the amount he/ she burns only. For example, you have a $7k line of credit. If you utilize $3k only, interest is charged on $3k only aka the borrowed money.
Savings
If you don’t want to end up in a debt circle, savings can be utilized for expenses. By using savings, you don’t have to pay interest.
How to Get a Personal Loan? | Practical Steps
The following steps are involved in getting a personal loan:
- Determine the Reasons for Getting a Personal Loan
You must have reasons to go for personal loans like financing a home repair or vehicle maintenance. This is because these loans come with a cost (interest rates) and obligation to repay in time.
- Look into your Credit Report
Your credit report displays your history with past lenders. A good history means good future lending terms and vice versa. Before applying for personal loans, don’t forget to examine the report for mistakes.
- File the dispute with credit bureaus (bureaus finalize your credit ratings) in case you pinpoint any mistake
- Check your Credit Score
A good credit score means more financing options, low-interest rates, more negotiation power, and more creditworthiness.
Personal loans are easy when you’ve higher scores. Low credit utilization, timely payments result in a good credit rating.
- Pick the most Suitable Personal Loan Type
Several factors influence while choosing the best suitable loan type: savings, monthly income, lifestyle, credit score, etc.
Secured loans require collateral, while unsecured ones do not. Fixed-rate loans have fixed repayment amounts while floating-rate loans do not. The best one is the one which is most suitable for the above-mentioned factors.
- Determine the Required Documents
For you to apply fast and be handed over the loan money, be sure to have the following documents:
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- Bank Statements
- Residence proof like lease agreement and property tax receipt
- Govt. ID
- Loan Application
- Social Security Card
- Credit Card Statement
- Tax returns
Lenders verify you with these documents.
- Compare Terms and Rates of Lenders
Myriad financing options and lenders are available in the market, be sure to make a list of relevant ones and compare the:
- Pay Attention to the Terms
Carefully read the agreement before making signatures. Look for any penalty fees and late payment fees. If the lender is permitted with automatic withdrawals – set up a protection net-like low-balance alert service in your bank account.
- Application and Approval
After the submission of the loan application (inclusive of income and residence proof), the banks/ lenders do a hard inquiry on your credit rating. Upon approval, you have released the loan money as per the bank’s timeline.
FAQs
Which banks offer easy personal loans?
Wells Fargo and USAA are some banks that offer easy personal loans. People with bad credit scores can also get qualified for personal loans.
In how many days your loan amount is released after approval?
In case you submit a personal loan request to credit unions and banks, loan money is released in 1-5 business days after your approval.
What credit score is ideal for a personal loan?
It depends upon the loan money you apply, e.g. for a $5k loan your credit score should be 580 or higher.
Do personal loans have any drawbacks?
Some personal loans may require collateral. They require fees in terms of interest rates. If failed to repay, these loans can damage your credit rating.
Is getting a personal loan a good idea?
You can qualify for a low-interest rate if you have a stable income and a good credit score.
What to know before considering personal loans?
- Your credit report is checked by lenders to see if you can afford the repayment.
- Would you be able to clear monthly payments with interest from your cash inflows?
- What’s the ratio of your income, savings, and expenses?
- Lenders require your employer’s contact and residence proof for security.