Personal Loans Basics: A Comprehensive Beginners Guide

There are reasonable ways available through which you can get cash during times of need. You can opt to borrow from family and friends or apply for credit cards from a bank of choice. There is, however, one option that stands out from the rest that comes laden with various advantages. The option is personal loans.

 

What Is A Personal Loan?

A personal loan allows you to borrow a predetermined amount of money with a fixed interest rate and a repayment period. It is easy to budget for personal loans because the fixed repayment period and amount are agreed upon ahead of time. The interest rates are negotiable based on the repayment period, the loan amount, and the borrower’s creditworthiness. The repayment term is usually several months or years, depending on the loan amount and the monthly payment commitment.

 

Why Do People Take Personal Loans?

It is easy to apply for personal loans compared to other types of loans. They come in handy when you want to accomplish a specified goal, such as home improvements, finishing a stalled project, or making expensive purchases. You can also use them for debt consolidation. If you have high-interest debt, such as credit card debt, eating into your monthly budget, you can apply for a low-interest personal loan to offset the high-interest loan. That will enable you to secure a set monthly payment amount and a fixed set-off date. Other reasons to take personal loans are as follows:

 

  • Paying for emergency medical bills
  • To pay for higher education fees
  • For purchasing a new or used vehicle
  • To pay for a wedding, holiday, or travel

Unsecured Versus Secured Loans

Personal loans usually come packaged in different forms: secured or unsecured. To qualify for a secured loan, you must present collateral to a lending company similar to Prosper. Collateral refers to an asset that the lender forfeits when you default on your loan payment. Since lenders consider secured loans safe, they have low-interest rates and high borrowing limits. However, lenders consider unsecured loans risky and therefore charge high-interest rates and reduced borrowing limits with rigorous terms.

 

Guide on Choosing the Right Personal Loan

When you are shopping for the right personal loan, it will be best to compare several lenders regarding their interest rates, fees, and the fine print. While a loan with a low-interest rate is right, it is essential that you also consider the origination fees along with other applicable fees. Taking into account these charges will ensure that the debt cost is not inflated. A personal loan is considered right if the lending company:

 

  • Offers competitive rates
  • Has a monthly loan payment and term you can afford
  • Charges minimal or no fees on the loan

How Can You Get Approved For A Personal Loan?

Some lenders will require that you put down collateral to qualify you for a secured personal loan. Others evaluate loan applications based on your creditworthiness. Primary factors considered before loans are approved include.

 

1. Credit History

Lenders usually scrutinize your credit score to determine how you have handled past debts. Credit reports contain all previous loan details, including late payments and other crucial records the lender may need.

 

2. Income

You ought to have enough income to apply for a personal loan as this will be a critical determining factor in the loan approval process. The provider may also look at your current debt to ensure the loan payment will not consume a big chunk of the monthly income.

Whether taking a personal loan for debt consolidation or buying your favorite kitchen appliance, always conduct adequate research to find the best loan option. You should also be deliberate about maintaining a good credit score to qualify for personal loans with the best interest rates and terms.