Choosing a Personal Loan
The demand for personal loans as a financing option has grown spontaneously in the recent past, with more consumers finding it to be the most viable quick source of money. Whether you are making a large purchase, meeting medical contingencies, emergency expenses, or even consolidation of a debt, a personal loan will assist you to meet any financial shortfall. But what are personal loans and how do they work? Here is an overview of personal loans and some tips when choosing a lender.
What Is a Personal Loan?
A personal loan is any sum of money loaned to an individual by an online lender, credit union, or a bank. Although few lenders will carry out checks on your credit score, there is little documentation demanded in the processing of a personal loan.
Lenders will require you to outline the purpose of applying for the personal loan. However, unlike other types of loans, a personal loan can be used for any other purpose, provided it is legal.
Types of Personal Loans
There are several types of personal loans, including;
1. Secured Loans
Although most of the personal loans are unsecured, some will require you to provide a valuable item or access to your savings account as collateral. Once you have fully repaid the loan, the lender will return the collateral. However, if you are unable to repay the loan, the lender is legally allowed to keep the collateral.
2. Unsecured Loans
This is the most sought-after type of personal loan. You are not required to provide any item as security for the loan. Due to their nature, unsecured personal loans come with higher interest rates, as it is assumed that the lender is taking a significant risk on you.
3. Fixed-rate Loans
This type of personal loans come with a fixed monthly installment and rate. You are required to pay the same amount of money every month throughout the life of your personal loan. The interest rate of this type of loan does not change throughout the repayment period.
4. Variable-rate Loans
The interest rates of this type of loans fluctuate over time based on the status of the market. Total interest costs and monthly payments can change at any time.
5. Debt Consolidation Loans
A debt consolidation loan combines your multiple loans into one loan. You can now repay all the loans as a single package through one fixed monthly installment.
Before Applying for a Personal Loan
There are several factors that you should take into account before you apply for a personal loan.
· Interest Rates
The amount surcharged on a borrowed loan is referred to as interest rate. Interest rates are outlined as a percentage of the borrowed amount. Compare the interest rates offered by various lenders and consider one with the lowest.
· Maintain a Good Credit Score
Your credit score is an indication of your creditworthiness. You can maintain a good credit history by repaying your bills and loans in good time. Most lenders will evaluate your credit score to determine your capacity to repay a personal loan.
· Assess Possible Costs
Depending on the lender, a personal loan is likely to come with costs such as a prepayment fee, late payment cost, or a processing fee.
· Amount Required
Personal loans can be tempting; therefore, you need to keep in mind that the lender does not regulate how you spend the money. Knowing how much you need is crucial in enabling you to borrow and spend money that you are in capacity to repay.
Personal Loan Application Process
The first stage of the personal loan application process is the submission of relevant documents. In this phase, you will be required to indicate the purpose of the loan. Most lenders will also require you to fill in an application form.
2. Credit Checks
The lender will perform a simple credit check on you to determine whether you are eligible for a loan and how much they can lend you.
Once the lender verifies that you are eligible for a loan, they will communicate to you about granting you the loan.
Choosing a Personal Loan Lender
When choosing a personal loan lender, you should consider the following;
· Compare Interest Rates
Interest rates vary from one lender to the other. It is, therefore, important that you choose a lender with interest rates that best suit your needs. This should also include a check on the lender’s annual percentage rate (APR)
Fees such as origination fees, processing fees, and prepayment penalties are likely to influence the total cost of your loan.
· Eligibility Requirements
Lenders will require you to have a good credit report. However, other lenders will demand to have a check on your income and your debt-to-income ratio before processing a personal loan.
It is essential to work with a lender with a good reputation, including excellent customer service and business ethics.