What is a Personal Loan?
If you find yourself in a position where you need some extra cash, a personal loan might be a great option for you. In fact, almost 20 million people have borrowed nearly $160 billion in personal loans, between 2009 and 2019.
Before opting to apply for a personal loan, however, it's important to understand what they are and what types are available.
What Is A Personal Loan?
As implied, a personal loan is a type of loan that is used for personal purposes, as opposed to business, student, or corporate loans. Many banks and credit unions focus on your credit score to determine your qualification status and interest rate. Other, alternative loan platforms, like Personify Financial, take additional factors into consideration such as your overall ability to pay, work history and income stability. This will also determine the amount of interest on the loan.
Unlike credit cards or other accounts where you can pay a minimum amount, personal loans are lump sum loans that are repaid with fixed payments (termed installment loan) for a period ranging anywhere up to five years.
Types of Personal Loans
All loans on the Personify platform are fixed rate loans. A fixed rate loan is one that has the same interest rate throughout its term. With a fixed rate loan, you will have the same set payment amount each month, regardless of what the market is doing.
PROS
Knowing in advance how much your monthly payments will be.
Potential savings. If interest rates increase, your monthly installment will stay the same.
CONS
Potential loss. If interest rates decline, you will be paying the same interest amount agreed upon.
A variable rate loan, unlike a fixed rate loan, means the interest rate can change and either increase or decrease, depending on market conditions affecting interest rates.
PROS
Could spend less. If the interest rate goes down, so will your monthly payments.
CONS
If interest rates go up, your payment amount will increase.
With a secured loan, you can use something you own for collateral. Common types of secured loans include:
- Mortgage loans
- Car Loans
- Secured Credit Cards
- Boat Loans
PROS
Lower fees and rates. Lenders are taking less of a risk so they may be more likely to have a lower interest rate.
Larger loan amounts. Depending on the collateral used, some lenders are more comfortable lending larger amounts knowing that, should you default on the loan, they are still covered.
CONS
Personal risk. If you run into unexpected financial difficulty and are unable to cover your loan debt, you will lose whatever assets you used for collateral.
Length of time. Sometimes larger amounts - such as mortgage loans - can extend for decades (as long as 30 years).
Unlike secured personal loans, unsecured loans are those that allow you to borrow money without putting up collateral.
PROS
With an unsecured loan, you're not at risk of losing your assets should you default for some reason.
Quick and convenient. Some lenders can approve you in just minutes and offer online loan applications directly, or through lending platforms such as Personify.
With some lenders, you don't need to have a prime credit score to get approved.
CONS
Can be more costly. Unsecured loans often have a higher interest rate.
Sometimes we can get overwhelmed with too many monthly debts to pay. A consolidation loan is a type of loan that allows individuals to take the lump sum of the loan and use it to pay off multiple other debts. Essentially, it consolidates all of your debt into one single monthly payment.
PROS
Lower rates. Often, you can benefit from a loan’s lower interest rates as opposed to the interest rates you are paying off.
Simplicity. Having a single payment to manage each month makes money management simpler.
CONS
Higher rates. Sometimes the interest rate for the new loan is higher than the interest you’re paying for the debt you are trying to consolidate. It is a good idea to check the interest rates offered by a new lender or platform before applying for a new loan.
Length of time. Sometimes the length of a consolidation loan term can be longer than the debts you are using it to pay off.
This type of loan is typically for people with poor, or little credit history, who may not qualify for a loan on their own. In these cases, someone with a higher credit score can co-sign for them, promising to pay back the debt if the borrower defaults and, thus increasing the chances for approval of the loan.
PROS
Being able to get a loan that otherwise may not be available.
Improve credit score. A co-sign loan allows you the opportunity to build up your credit to a level where you don't need a co-signer for future loans.
Lower rates. Frequently, a co-signer with a higher credit score will qualify for a lower interest rate.
CONS
Co-signer is responsible. This means if you fail to make the payments to repay the loan, the co-signer is responsible for either paying for it, or losing their assets.
Can strain relationships. It can be stressful for both you and the co-signer. Especially if you default on the loan and the co-signer is made responsible for your debt.
Reasons People Get Personal Loans
According to Bankrate.com, the top reasons individuals take out personal loans are:
- Debt consolidation
- Alternative to a payday loan
- Home remodeling
- Moving costs
- Emergency expenses
- Appliance purchases
- Vehicle Financing
- Wedding expenses
- Vacation costs
Before Getting a Personal Loan
Before applying for a personal loan, you might want to find a company you feel you can trust, (read customer reviews and check with the Better Business Bureau) and choose a lender or lending platform that seems like a good fit for your credit profile. Some companies are more specialized in serving people with less than perfect credit. And make sure you are fully aware of the terms and obligations of the loan.
Before committing, make sure you understand all of the important aspects of the loan, including:
- Length of loan (term)
- Interest rate, including APR
- Monthly payment amount
Knowing these things, can help you budget for repayment of the loan which will increase your chance of satisfying the debt which can help improve your credit rating.
A personal loan can really help when you need to get money quickly. Explore all of your options and do what's best for your unique situation. If you think a personal loan is right for you, you might want to consider applying for a loan on our Personify platform. We feature unsecured fixed rate personal loans with funds deposited directly into your checking account.
