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Personal Loans

Personal Loan Overview

Personal loans are one of many types of loans that we help our readers find. A personal loan is, in general, a loan that you can use at your discretion. Once secured, you can use it for anything:

  • debt consolidation
  • paying for unexpected expenses
  • home improvement projects

The possibilities are endless! It is important to understand that personal loans are sometimes more difficult to get and have strict qualification requirements. If you’re thinking about borrowing with a personal loan, here are some things you know.

Personal loans = unsecured

Unsecured = loan made without an asset given as security. That means that the loan does not require you to use an asset as collateral. In other words, if you default on a personal loan, the lender cannot immediately take or reposess a piece of your property as payment for the loan. Remember unsecured personal loans are more risky for the lender and can be more difficult to secure. The lender does not have any asset to seize if you cannot make loan payments. This is a good deal for you, especially if you do not own assets.

But what about the lender?

Even though the lender cannot immediately take your house or car, it can (and probably will) take other collection actions if you default on the loan. Actions that a lender can take include:

  • reporting late payments to the credit bureaus
  • hiring a collection agency
  • filing a lawsuit against you

Personal loans terms

The personal loans that we help our readers find range anywhere from $1,000 to $35,000. The overall amount depends on your needs, your lender, your income, and your credit rating. The better your credit score and the higher your income, the greater chance you have to borrow larger amounts of money.

Each applicant will have a unique situation. Loans fit each applicants situation. For example, if you have a 6 figure income and great credit, you should be near the top of your borrowing capacity. With a US median income and low or even poor credit, loan approval is likely at a lesser amount. Remember, the most important part is to borrow only what you need! There is no reason to dig a huge ditch when you only need a small shallow hole.

Unlike credit cards, personal loans are a one time loan. You cannot borrow from the same loan over and over again. Credit cards offer loans called “revolving credit”. We talk more about that here. There are cards and plans out there that will reward you uniquely for your own situation. Check them out, do some research and then use them wisely!

Back to Personal Loans

Each payment on the loan will reduce the overall loan balance. Like we reviewed above, payments on your personal loan balance do NOT open up available credit that you can immediatly borrow from again. Chip away at the loan until repayed in full. Review your loan documents to understand any prepayment penalties. A prepayment penalty will be an additional fee that you have to pay if you pay off the loan early. This helps the lender ensure a certian return on their investment.

Keep up with your payments and your lender will hold you in high esteem. Paying off the loan closes the account. If you need more money once the loan is done and want another personal loan, you will have to reapply for a new loan.

Interest rates

All loans have an interest charge. Take this into careful consideration and understand the interest charges when applying for your loan. Personal loans usually have a fixed rate. A fixed rate is a locked rate, which will not fluctuate during the life of your loan.

The higher your credit score the lower your interest rate should be. The lender will see your application as a lower risk of default and can expect to make his money back over time without problem.

The lower your credit score, the higher the risk is for the lender that you will default. They charge a higher interest rate to make their money back faster.

Lower interest rates are natually better for the applicant. It means that you will pay a lower cost for borrowing money. Some personal loan offers have variable interest rates. A variable rate will change periodically during your loan.

The downside of a variable interest rate is that your payments can fluctuate as your rate changes. This makes it hard to effectively budget for your loan payments. However, if you expect interest rates to fall, this may be an ideal situation for you.

Fixed repayment period

Personal loans will almost always require a fixed repayment period. These are the most common personal loan terms, shown in months: 12, 24, 36, 48, 60, and sometimes 72 months. The longer the repayment terms, the lower your payment will be and the more interest you will pay. Your loan term may also affect your interest rate. A shorter term may offer a lower interest rate, meaning a lower cost loan for you.

Remember when we talked about only getting what you need? This is where it is important.

Get the terms that are right for you. If cashflow is tight and a 60 month term is best for you, then go for it. If you have cashflow but no savings and can do a 24 month term, then do that.

Loans and your credit score

This is important because you credit rating is a measure of your financial credibility. As a result, most lenders will be reporting all of your activity to the credit bureaus.  Especially relevant:

  • shopping for a loan
  • applying for a loan
  • payments on your loan
  • loan delinquincy

All movement will affect your credit score. The key to maintaining a solid credit score and to improving a lower score is making your loan payments on time everytime.

Take action today!