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Personal Loans: What Personal Loans Are, How To Get Personal Loans, and How To Pay Personal Loans Off |
by Kathleen Seligman Life is full of surprises. You can be going about your normal routine – going to work, earning a paycheck, successfully paying your bills – then something unexpected happens, and that something comes with a hefty price tag. Maybe your car breaks down, your child needs help paying for college, you suddenly feel the need for a luxury vacation, or you just want to consolidate your debts. A personal loan can meet all of these needs.
What is a personal loan?
A personal loan is a loan that can be designated for any number of personal expenses. There are two types of personal loans available: secured personal loans and unsecured personal loans. A secured personal loan is one that uses collateral, such as a house or car, to back the loan. To be eligible for unsecured personal loans, which are by far much more common, you don’t need to put up any kind of collateral. You can apply for a personal loan at any bank, building agency, or other official lender.
The amount of money you can borrow with a personal loan can vary by lending institution and your personal credit rating. Personal loan amounts normally range between $500 and $10,000. If you want to borrow a larger sum, lending agencies will likely require you to change to a secured personal loan and use your home, car, or other assets as collateral.
How Do You Apply For A Personal Loan?
You can apply for a personal loan in person at any bank or lending agency. Many banks also have websites where you can apply for a personal loan online. After filling out an Internet application, a loan representative will contact you to discuss your personal loan options. When applying for a personal loan, you will need to provide your personal information, proof of employment, as well as your financial history and current status. You’ll also need to specify how much money you want to borrow for your personal loan and what you intend to use the money for.
Another piece of information that banks and lending agencies require is whether or not you have a co-signer for your personal loan. If this is your first personal loan, or if your credit is not perfect, you may be required to have a co-signer for your loan application. A co-signer agrees to pay back the personal loan if the original borrower cannot. Co-signers take on the exact same legal obligation as the individual applying for the personal loan.
Even if you do qualify for a personal loan in your own right, however, it might still be in your best interest to have a co-signer. The Nellie Mae Foundation explains that having a co-signer can increase your chances of getting a personal loan, shorten the time it takes to be approved, and reduce any additional costs associated with your personal loan. For example, if you took out a 20-year $10,000 personal loan without a co-signer, you could have a 7.38% interest rate and end up paying $21,197. With a co-signer, your interest rate could be as low as 6.65% and your total loan cost would be $19,997 – a $1200 savings.
Since interest rates and loan fees can differ between lending agencies, you should shop around before you apply for any specific personal loan. By calling banks and visiting the websites of various lending companies, you can inquire about the fine print involved in any personal loan application.
Aside from interest rates, loan amounts, and time of repayment, there are some additional aspects of your personal loan you need to consider, such as fixed interest rates and early payment penalties. Lending institutions often begin a loan with a startlingly low interest rate to attract personal loan applicants. These low rates may seem tempting at first, but can double or triple soon after you sign your loan papers. Before you agree to anything, find out if the rate is fixed or variable. A fixed interest rate will remain the same throughout the life of your personal loan, while a variable rate can change according to general annual percentage rate fluctuations. Fixed interest rates might initially be higher than variable rates, but you will save money over the long-term life of your personal loan by choosing a lender that offers you a constant rate of interest.
It’s also important to find out if your personal loan comes with early repayment penalties. In order to lessen the money you spend paying interest, you might try to pay off your personal loan before you reach the end of your loan term. You need to be careful, however, since some institutions will charge you an additional fee for paying off your personal loan earlier than you had to.
When you’ve found, applied, and been approved for the personal loan that’s right for you, you’ll receive a lump sum either in the form of a check or a direct deposit into your bank account.
How Do You Repay A Personal Loan?
Once you receive your personal loan amount, you will need to start making regular monthly payments to the lending institution in order to repay your personal loan. A percentage of each payment will go towards repaying the principal amount you borrowed with your personal loan, and the rest will pay for the interest your personal loan accrues.
If possible, it is a good idea to pay more than your monthly personal loan payment. As long as your personal loan didn’t come with any early repayment penalties, the more extra money you pay each month, the sooner you’ll pay off your personal loan and the less interest you’ll pay. Make sure, however, when you pay extra or make additional payments that you specify you want the money to be applied to your personal loan’s principal. Paying off your personal loan in this fashion can shave years off the life of your loan. At current average interest rates, if you only make the minimum monthly payments, you will end up paying more than twice the amount of your original personal loan. Even paying a few dollars extra each month could end up saving you thousands of dollars in the long run.
Even though life can be unpredictable, and unplanned expenses may be just around the corner, you can be prepared for them by understanding the ins and outs of personal loans. So fix that car, pay for your child’s education, consolidate your bills, and go on that vacation. You don’t have to be intimidated by the unforeseen costs life throws your way.
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