Understanding Personal Loans

Understanding Personal Loans

A personal loan can be the buffer you need to meet your financial goals—be that debt consolidation, a special purchase, or unexpected expenses.

To help you make the most of this excellent personal finance tool, we created this comprehensive guide (complete with an equally comprehensive infographic) which outlines the personal loan basics: loan types, application process, how interest rates work, and how to borrow wisely. 

Personal Loan Primer

What is a personal loan? A personal loan is a form of installment borrowing, which means you borrow a sum of money from a financial institution, credit union, or online lender, and pay the balance back in fixed monthly payments for two to seven years.

Personal loans come in two forms:

  • Secured loan: Requires collateral or an asset. Lower interest rates available because the loan is less risky for the lender.
  • Unsecured loan: Doesn’t require collateral. Higher interest rates are common because the loan is more risky for the lender.

Application Process

6 Steps to Apply

  • Assess your needs. How much do you need to borrow? And for what?
  • Check your credit score. Lenders use your score to help set your interest rate.
  • Shop around. Not all lenders offer the same rate on the same loan amount.
  • Fill out your application and supply any required documentation.
  • Approval. If approved, you’ll receive the funds. The typical lender disperses the funds within two to seven days.

How Interest Rates are Determined

The interest rate you’ll receive for your personal loan is determined by the lender and is based on five key factors:

  • Credit score. The higher your score, the lower your rate.
  • Income. Demonstrating a stable and ample income can result in more favorable terms.
  • Debt-to-income ratio. The lower the ratio, the less risky you appear to the lender, usually leading to a better interest rate.

Reading the Fine Print

Prepayment penalties. A fee the lender charges if you pay your loan off early.

Origination fees. Some lenders charge this small, one-time fee. It’s taken out of your loan when you receive the money.

Clarity in the payment schedule. Lenders must show you exactly what you’ll owe in a monthly statement. This is called a Truth in Lending disclosure.

Borrowing Tips

Only take what you need. You might qualify to borrow more, but don’t if you don’t have to.

Check your monthly payment against your budget. It should not be a struggle to make your payment every month.

Even an unsecured personal loan still affects more than just your wallet. It will leave a mark on your credit score. Have a plan when you borrow – and make sure it’s a good one.

Ultimately, personal loans can help you reach your financial goals, but only if you know how to use them. By understanding the types of loans available, how to apply, what determines your interest rate, and how crucial responsible borrowing is, now you can make informed financial decisions.

After all, understanding these components of your borrowed money is just as important to your financial health as it is in reaching your short-term goals.

Disclaimer

This content is provided for informational purposes only and is not intended as investment advice, nor should it be considered a recommendation to buy, sell, or hold any particular security or pursue any specific investment strategy. The information and opinions expressed herein are based on sources believed to be reliable, but no guarantee can be made as to their accuracy or completeness. Investing in the financial markets involves risks, and there is always the potential of losing money when you invest in securities.

Individuals should consider their financial condition, investment objectives, risk tolerance, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. Neither the author nor the publisher assumes any liability for any loss or damage resulting from the use of this information.

A personal loan can be the buffer you need to meet your financial goals—be that debt consolidation, a special purchase, or unexpected expenses.

To help you make the most of this excellent personal finance tool, we created this comprehensive guide (complete with an equally comprehensive infographic) which outlines the personal loan basics: loan types, application process, how interest rates work, and how to borrow wisely. 

Personal Loan Primer

What is a personal loan? A personal loan is a form of installment borrowing, which means you borrow a sum of money from a financial institution, credit union, or online lender, and pay the balance back in fixed monthly payments for two to seven years.

Personal loans come in two forms:

  • Secured loan: Requires collateral or an asset. Lower interest rates available because the loan is less risky for the lender.
  • Unsecured loan: Doesn’t require collateral. Higher interest rates are common because the loan is more risky for the lender.

Application Process

6 Steps to Apply

  • Assess your needs. How much do you need to borrow? And for what?
  • Check your credit score. Lenders use your score to help set your interest rate.
  • Shop around. Not all lenders offer the same rate on the same loan amount.
  • Fill out your application and supply any required documentation.
  • Approval. If approved, you’ll receive the funds. The typical lender disperses the funds within two to seven days.

How Interest Rates are Determined

The interest rate you’ll receive for your personal loan is determined by the lender and is based on five key factors:

  • Credit score. The higher your score, the lower your rate.
  • Income. Demonstrating a stable and ample income can result in more favorable terms.
  • Debt-to-income ratio. The lower the ratio, the less risky you appear to the lender, usually leading to a better interest rate.

Reading the Fine Print

Prepayment penalties. A fee the lender charges if you pay your loan off early.

Origination fees. Some lenders charge this small, one-time fee. It’s taken out of your loan when you receive the money.

Clarity in the payment schedule. Lenders must show you exactly what you’ll owe in a monthly statement. This is called a Truth in Lending disclosure.

Borrowing Tips

Only take what you need. You might qualify to borrow more, but don’t if you don’t have to.

Check your monthly payment against your budget. It should not be a struggle to make your payment every month.

Even an unsecured personal loan still affects more than just your wallet. It will leave a mark on your credit score. Have a plan when you borrow – and make sure it’s a good one.

Ultimately, personal loans can help you reach your financial goals, but only if you know how to use them. By understanding the types of loans available, how to apply, what determines your interest rate, and how crucial responsible borrowing is, now you can make informed financial decisions.

After all, understanding these components of your borrowed money is just as important to your financial health as it is in reaching your short-term goals.

Disclaimer

This content is provided for informational purposes only and is not intended as investment advice, nor should it be considered a recommendation to buy, sell, or hold any particular security or pursue any specific investment strategy. The information and opinions expressed herein are based on sources believed to be reliable, but no guarantee can be made as to their accuracy or completeness. Investing in the financial markets involves risks, and there is always the potential of losing money when you invest in securities.

Individuals should consider their financial condition, investment objectives, risk tolerance, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. Neither the author nor the publisher assumes any liability for any loss or damage resulting from the use of this information.

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