What is Personal Loan?
A personal loan is a lump sum of an amount borrowed from a financial institution used at the borrower’s discretion. However, sometimes lenders restrict the way you use the money.
A personal loan is taken when a sudden expense arises, and it is too much to put on the credit card. It is generally an unsecured personal loan and does not require collateral. Collateral is an asset that you need to provide against a loan amount. It can be captured and sold to repay the loan amount if the borrower fails to do so within the specified time duration.
Most lenders give out a personal loan based on the applicant’s creditworthiness and do not require collateral to secure funding.
How do personal loans work?
Just like when you compare the best business loans, personal loans also work similarly to other loan options. A lender or a financial institution loans out a lump sum of the amount to the borrower. A borrower has to repay it over fixed monthly instalments within the specified time.
Other factors to consider when selecting a personal loan are as follows:
Interest Rates: If your credit score is stellar, you might get a personal loan for low-interest rates. Personal loans generally have fixed interest rates, which mean that you pay the same amount every month until your loan is serviced completely.
Repayment duration: Typically, the loan repayment time for personal loans is one to five years. There are no prepayment penalties, so you can pay off the loan as early as possible and save on interest.
Origination Fee: Some lenders require a borrower to pay an upfront amount within the range of 1-8% of the loan amount as origination fees. At the same time, other lenders add the charges to the interest rate. Origination fees depend on the credit score of the borrower.
Types of personal loans
There are various options that one can look up to secure a personal loan. Some of the options are as follow:
Standard Personal Loan:
Banks and credit unions offer personal loans. You can visit a bank or apply online to secure financing quickly in your checking account.
Online lenders and peer-to-peer sites offer loans to borrowers from investors and financial institutions. These lenders often use alternative credit scoring models, and the application process is quick and easy.
Some lenders work directly with service providers to provide personal loans. Borrowing from these specialized lenders is convenient, and they may give a loan for various purposes like dental work, landscaping projects, etcetera.
Why do people apply for personal loans?
When should you apply for a personal loan?
Personal loans are general purpose loans and can help you finance anything. Some common reasons people opt for personal loans include:
Personal loan for Unexpected Expenses
Medical Expenses, Home improvement loans for renovations, replacing broken equipment are the kind of sudden expenses, which can be covered under the personal loan option.
Personal Loan for important vents
Major events like weddings, birthdays, anniversaries can be paid for by personal loan options. A person who does not have enough savings to host or pay for an event can apply for a personal loan.
The personal loan can be used to settle down credit cards or any other debts. You might notice that the interest rate of the loan is more economical than the average rate of interest for your distinct debts.
personal loan for College fees
You can also use a personal loan to finance your education and pay all the expenses that come along with college. You can even use it to settle the student loan amounts taken by you. Though, personal loans do not have the same tax benefits as the student loans admitted federally.
How to apply for personal loans?
You might want to approach the bank or the credit union where you already have an established relationship. They will most likely want to know how to plan on spending the loan amount. Based on this, they might suggest to you some other option that better suits your needs. Watch out for scams and avoid getting into any deal that guarantees approval for a loan without a credit history.
Many lenders offer personal loans. However, banks and credit unions tend to offer better interest rates. Sometimes online lenders have a higher interest rate but better terms, mainly to borrowers having an excellent credit history. Thus, terms, rates, and conditions may differ significantly from lender to lender. Good research will help you secure an ideal loan for your needs.
The loan amount can be used for any purpose, with little to no restriction. Personal loans are difficult to secure and require a good credit history. Personal loans help you meet any shortfall that you may experience while buying a house or a car, paying for your child’s higher education, or even in cases of medical emergencies, among other things.
The loan processing time and disbursement of the amount are speedy. Thus, this makes personal loans an attractive option for looking for an immediate financial fix.