What You Need to Know About Personal Loans
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Personal loans are a type of installment loan where a lender loans you a lump sum of money and you, the borrower, pay it back in regular intervals. Personal loans can be secured — where you’ll need to put up collateral — or unsecured. Features such as interest rates, loan amount, and repayment terms vary by lender. In many cases, applying for a personal loan is a straightforward process, and funding can be as soon as the next business day.
Why Get a Personal Loan?
Personal loans can be useful tools in your financial life. When used responsibly — such as paying back your loan on time — it can help you make larger purchases you may not have had the opportunity to otherwise. For example, you can take out an auto loan to purchase a car that’s needed to commute to work.
Personal loans can also be taken out for different reasons, some of which include:
- Large medical bills
- Cover an emergency expense like making repairs to your roof
- Home renovation
- Costs related to moving
Debt consolidation is another popular reason borrowers take out a personal loan. Instead of paying off multiple loans, you can take out one personal loan to pay them off and you’re left with one monthly loan payment. Consolidating debts can help you lower monthly loan payments if you have a longer loan term compared to your other ones. Or, your interest rate is now lower. Either way, it can help give you some breathing room and free up cash you can use in other areas of your financial life.
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What to Look For In a Personal Loan
Before signing up for any personal loan, it’s important to compare your options. That way, you end up working with a lender and take out a personal loan that’s the best fit. Get quotes from several lenders. Some may even allow you to get prequalified so you can check what rates terms you qualify for without it affecting your credit score.
Factors to compare when deciding on a personal loan include:
- Interest rates: Ideally, you’ll find a loan that offers you the lowest interest rate, as that’ll save you the most. What you may qualify for will depend on factors like your credit score. When comparing loans, check the annual percentage rate (APR) as that’ll include the interest rate and any costs you’ll pay for the loan. It’s a more accurate comparison.
- Repayment terms: Lenders offer different terms for their personal loans. Consider how soon you want to pay back a loan, or whether you want a lengthier term for some flexibility. Keep in mind that the longer your repayment term, the more interest you could pay since you’re making more payments.
- Fees: You may pay costs such as origination or application fees. Lenders may also impose late or returned payment fees, though this may not matter as much if you’re consistent with your payments.
- Credit score: Some lenders may not be willing to work with those who have lower credit scores. If that’s your situation, you may have a better chance with lenders that specifically work with those who have limited or bad credit.
- Customer service: You want to be able to speak to a representative in your preferred mode of communication. Look at the lender’s business hours and research third-party reviews to see what existing customers feel about the company. Some lenders may also have programs in place for those who experience financial hardships — it doesn’t hurt to see what those may be just in case.
What to Watch Out For When Taking Out a Personal Loan
While a personal loan can be helpful, it can hinder your financial situation if you’re on a limited budget. Yes, there may be instances where you have no choice but to borrow money. If you can help it, consider whether you can afford to take on a loan payment when you don’t have to. Otherwise, you could be stretched too thin and risk falling behind on your finances.
When looking at lenders, you’ll want to check to ensure they’re legitimate. Some warning signs of questionable lenders can include:
- Asking you to leave out or falsify information
- Making promises that seem too good to be true
- Written terms are different from what you were initially told
- Rushing you through the decision making and application process
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Does Getting a Personal Loan Impact My Credit Score?
Getting a personal loan can impact your credit score in several ways. First, when you submit an application for a loan, the lender will conduct a hard credit inquiry to check your credit history. Doing so can affect your credit score, though how much it’ll affect it will depend on your existing score and credit history. While it may not be a big deal, applying for multiple loans can.
Once you have a personal loan, your payment activity is typically reported to the credit bureaus — Experian, TransUnion and Equifax. The reported information goes on your credit report and is what’s used to calculate your credit score. Factors like consistent on-time payments can positively affect it, whereas it’ll have a negative impact if you’re late on payments.
Since personal loans can affect your credit history and other areas of your financial life, it’s worth taking the time to determine whether you need a loan in the first place and which lender is the best fit for your financial needs. Doing so could save you money on interest costs.
