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, more than 10 percent of consumers held a personal loan at the end of 2019.
Before opting to apply for a personal loan, however, it's important to understand what they are and what types are available.
As implied, a personal loan is a type of loan that is used for personal purposes, as opposed to business, student, or corporate loans. Most banks and credit unions focus on your credit score to determine your qualification status and interest rate. Other, alternative lenders, 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.
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.
Knowing in advance how much your monthly payments will be.
Potential savings. If interest rates increase, your monthly installment will stay the same.
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.
Could spend less. If the interest rate goes down, so will your monthly payments.
If interest rates go up, your payment amount will increase.
With a secured personal loan, you can use something you own for collateral. Common types of secured personal loans include:
Lower fees and rates. Lenders are taking less of a risk so they are more likely to have a lower interest rate.
Larger loan amounts. Depending on the collateral used, lenders are more comfortable lending larger amounts knowing that, should you default on the loan, they are still covered.
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.
No risk for you. 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.
You don't need to have a prime credit score to get approved.
Can be more costly. Unsecured loans often have a higher rate of interest.
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.
Lower rates. Often, you can benefit from a loans 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.
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.
If someone co-signs for you, your assets are protected.
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.
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.
According to Bankrate.com, the top 10 reasons individuals take out personal loans are:
As you might guess, many of the reasons are to cover unexpected expenses.
Before applying for a personal loan, find a company you feel you can trust (read customer reviews and check with the Better Business Bureau) and choose a lender that seems like a good fit for your credit profile. Some companies are more specialized in serving people with less than perfect credit. Speak with the lender and be clear on the terms of the loan.
Before committing, make sure you understand:
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 and your luck with traditional lenders hasn't been great, apply for a loan with Personify Financial. We offer unsecured fixed rate loans that can be used for almost anything.