With over 44 million graduates dealing with education-related debt, “student loan” has certainly become a buzzword. However, student loans aren’t the only type of loans available to those who may need to borrow money. Personal loans are another type of loan available to cover expenses in a variety of circumstances. Folks often turn to them because of their low, fixed interest rates.
Personal loans can be used for many things; paying for a nice vacation, buying a car, furnishing a home, or making other purchases. Importantly, they can also be used to consolidate and pay off debt at a lower, fixed interest rate. Many people use them to pay off credit card debt, for example, because consumer debt tends to have variable and often high-interest rates. Personal loans can be a great option to improve your financial situation or make an important purchase.
Sounding like a personal loan might be a good option for your situation? Consider these factors before taking one out.
What types of personal loans exist?
Personal loans are either secured or unsecured.
Folks who receive secured personal loans have to provide some type of collateral in the form of an asset (e.g., their car, house, money in a bank account, an investment, etc.). Keep in mind that defaulting-when you don’t repay the amount you previously agreed to pay on time-on a secured personal loan can be particularly tricky. Imagine, for example, that you put up your car as collateral for a hefty personal loan. If you default on that loan, your lender may have the right to repossess the car you used as collateral.
Unsecured personal loans allow the borrower to take out a loan without providing collateral. However, keep in mind that this isn’t a free pass to avoid paying back the loan. In fact, if you default on both secured and unsecured personal loans, your credit score will suffer, hurting your ability to benefit from other types of loans and financial opportunities in the future.
How can I take out a personal loan?
1. Get your financial facts straight
Before you approach a credit union, money lender, or bank, make sure to have your financial facts straight. What is your credit score? What’s your credit report like? How is your current level of debt compared with your income? What do you need for a personal loan? How much do you need?
When you calculate this last number, be sure to take into account if your potential lenders charge origination fees (cost for activating a new loan) on top of interest fees. Also, it is advisable only to take out as much as you absolutely need in order to avoid getting hit with fees down the road.
2. Compare lenders
Lenders may have different (or no) origination fees or different APR rates. These often vary between 6% and a whopping 36% APR. Because of this variability, it’s important to shop around.
3. Apply for the loan
That’s right–you have to apply for personal loans, and there’s a chance you could be rejected. If you are rejected, there might be an issue with your debt-income ratio, credit score, or other red flag. If you are rejected by one lender, there’s still a chance that you might be accepted by another.
4. Accept the personal loan
After being accepted by the lender to receive the personal loan you’ve solicited, there may be additional steps to complete. Different lenders may have different methods of getting the money to you: check, direct deposit or even directly paying off creditors if, for example, you want to use your personal loan to consolidate debt. Make sure to have a clear idea of how you should expect the money to avoid any hiccups.
5. Plan and automate your payments
To avoid getting into loan-related troubles down the road, you should plan how to begin repaying immediately upon accepting the loan. Automating payments is one of your best tools to make sure they are regularly done on time. Outsourcing the work of important financial decisions like debt repayment is an easy way to preserve our much needed financial willpower reserves.
Personal loans can be an important tool to help you meet individual or financial goals. However, like any loan, it’s important to consider the advantages and disadvantages before getting into debt. For other helpful lessons on personal finance, check out the rest of our Academy library!
