The number of individuals with personal loans has grown over the past few years, from 15 million to over 20 million, as per TransUnion.
The reason why personal loan are attractive to the masses? They offer lower rates of interest for those who have good credit, and they’re generally lower loan amounts than other types of loans. However, they’re not necessarily the best option for everyone.
If you’re considering applying for the personal loan, here are the six essential things to be aware of about personal loans before making your final choice.
1. What is the process for personal loans?
They are kind of installment loan. It means that you’ll borrow an amount that is fixed and repay it with installments of interest each month throughout the duration of the loan – that typically spans between 12 to 84 years. After you’ve paid off your loan in the full amount, your account will be shut. If you require more funds you’ll need to make an application for a new loan.
The amount of loans vary from lender to lender however they are typically $1,500 to up to $100,000. The amount you are eligible for depends upon the state of your credit condition (i.e. how certain are lenders in their ability to pay you back in the event that they loan the money).
It’s crucial to determine the reasons you require money , and then pick the type of loan best suited to your financial situation.
2. Different types of personal loans
There are two kinds of personal loans: secured and unsecure.
- Personal loans that are not secured aren’t secured by collateral. The lender determines if you’re eligible by looking at your financial records. If you’re not eligible for an unsecure loan or prefer a lower rates of interest, some companies provide secured loans.
- Personal loans that are secured are secured by collateral, like an account for savings or CD. If you’re not able to pay your loan your lender is able to use your asset as a repayment to repay the loan.
3. How can you get a personal loan
Banks are most likely one of the first institutions that spring to your mind when thinking of where you can get loans. However, they’re not the only financial institution offering personal loans.
Credit unions, consumer finance firms, online lenders , and peer-to peer lenders can also provide credit to those who meet the criteria.
A quick tip Numerous online lenders have emerged in recent times. If you’re unsure if the legitimacy of a particular lender is assured you should check with the Consumer Financial Protection Bureau or Better Business Bureau.
4. Personal loans compare to. other loan options
Personal loans are a great way to get the cash you require in various circumstances, they might not be the best option for you. If you’re in good credit, you may be eligible for a balance transfer credit card that has a zero percent introductory APR. If you can settle the balance prior to when the interest rate rises then using a credit card could be the better choice.
Beware: If you obtain an account for balance transfer and are unable to pay off your amount or settle a payment by the time the time that the promotional rate expires and you are charged interest, you could end up paying hundreds or even thousands of dollars in interest costs.
If you’re homeowner you could consider taking out the possibility of a line credit often referred to as HELs or HELOCs. These types of loans can offer the funds you require for greater loan amounts at low rates. While HELs are usually installment loans, HELOCs are an alternative to rotating credit. However, be aware that your house is used as collateral for these accounts. If you fail to pay the lender typically can take over your home as repayment to repay the loan.
5. Effect upon your credit scores
If you are applying for an loan the lender will look at your credit during the process of applying. This is referred to as a”hard inquiry”. It generally lowers the credit scores by couple of points.
Generally speaking, inquiries that are hard remain the credit reports for two years.
If you’re looking for the lowest rates, the banks already have an account with will look into your credit. This is referred to as soft inquiry, and it doesn’t impact your credit scores.
Check your rates with lenders who make soft pulls, which will not affect your score.
6. Other fees and interest rates
Rates of interest and fees can have a significant impact on the amount you will spend over the duration of a loan. And they differ between lenders. Here are a few things to take into consideration.
- Rates of interest: Rates typically range from 5% to 36%, contingent upon the lending institution and credit. The higher your credit is, the lower the interest rate you’ll pay. Also, the longer your loan’s term, the higher rate of interest you’ll be paying.
- Origination charges: Some lenders charge an amount to cover the costs to process the loan. The fees for origination typically range from 1 to six percent on the loan amount.
- Penalties for prepayment: Certain lenders will charge an amount for you to repay your loan earlier because it means the lenders have to miss out on some interest they would otherwise have earned.
Before you sign on your dotted line you should consider adding all the costs that are associated with your loan and not only the interest rate, to figure out the total amount you’ll have to repay.