Millions of Americans each year use personal loans to strengthen their debt, pay for unforeseen expenses, improve their homes and more.
According to TransUnion, the number of persons with personal loans has increased from 23 million to more than 27 million in recent years. Personal loans were actually the fastest growing credit product in 2016.
So why are so many personal loans attractive? Low interest rates for consumers with good loans are provided by personal loans, and they are generally smaller loans than other types of loans. But for everyone, they aren’t necessarily the best solution.
If you want a personal loan, here are a couple of things to consider before you decide.
List of things you should know about Personal Loan
- How personal loans work
- Types of personal loans
- Where you can get a personal loan
- Personal loans vs. other lending options
- Impact on your credit scores
- Interest rates and other fees
1. How personal loans work is a type of payment loan
This means that, for a period of 12 to 84 months, you borrow a fixed amount of money and repay it with interest in monthly installments over the life of this loan. Your account is closed once you have paid your loan in full. You must apply for a new loan if you need more money.
According to David Reiling, CEO of Sunrise Banks, it is important to consider why you need the money and then choose the kind of loan best suited for your financial situation.
2. Types of personal loans
Two kinds of personal loans are available — secured and unsecured.
Unsecured loans are not collateral-backed. Based on your financial history, the lender decides whether you qualify. Some lenders also offer secure options when you do not qualify for an unsecured loan or want a lower interest rate.
Secured loans, such as a savings account or CD, are backed by collateral. If you can not make your payments, your lender is typically entitled to claim the loan for your asset.
3. Where you can get a personal loan?
Bank is probably one of the first places to think about where you can get a loan. But they are not the only kind of loan providing personal loans.
Loans are also available to qualified applicants from Credit Unions, Consumer Finance, Online Lenders and Peer-to-Peer Lenders.
4. Personal loans vs. other lending options
While personal loans can deliver the money you need for a variety of situations, they may not be your best choice. If you have a good credit, you can qualify for a 0 percent introductory APR balance transfer credit card. A credit card can be a better option if you can pay the balance before the interest rate rises.
Be aware that if you receive a balance transfer card and you can not pay your balance or pay late before the introductory rate expires, you may charge interest charges of hundreds or thousands of dollars.
If you are a homeowner, you could take into consideration a home equity loan or credit line, sometimes referred to as HEL or HELOC. These types of loans could provide the financing you require at low rates for larger loans. Although HELs are generally installment loans, HELOCs are a kind of revolving loan. But, be careful, your house is the collateral for such accounts. If you default, your creditor will normally be entitled to foreclose the credit for your home.
5. Impact on your credit scores
When you apply for a loan, the lender will apply for your loan. This is known as a tough survey and usually reduces your credit ratings by a few points.
6. Interest rates and other charges
Interest rates and charges can greatly affect how much you pay over the life of a loan, and vary widely between creditors and creditors. Here are some things to take into account.
Interest rates: typically, rates range between 5% and 36% depending on your loan and loan. Generally speaking, the better your loan, the lower your interest rate. The longer the duration of your loan, the more interest you will probably pay.
Original fees: Some lenders charge a fee for processing the loan. Original charges are typically between 1 and 6% of the loan amount.
Prepayment sanctions: Some lenders charge a fee if you pay your loan early, because early repayment means that the lenders do not have some of the interest they would otherwise have earned.
Consider adding all the costs associated with the loan, not just the interest rate, before signing on the dotted line in order to determine the total amount of money you are responsible for repaying.
The bottom line
While an individual loan can be a good option if you need extra money for a certain purpose, many factors have to be taken into consideration before deciding which type of loan is the best for your situation.
“I think the most important thing… is your debt to make sure you feel comfortable with the payments you can afford and that the loan[ is] structured so that you don’t feel trapped,” says Reiling.