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If you’re considering a personal loan, you’re probably wondering where to start your search and what exactly a personal loan is all about. You’re in the right place!
In this post, we dive into the ins and outs of a personal loan, what it’s used for, how to qualify for one, and what to expect as far as loan terms. Let’s get started!
What is a Personal Loan?
A personal loan is typically an installment loan type deal. You pay back a certain amount each month until the loan is paid off.
The installment loan usually has a set interest rate that’s fixed throughout the entire loan term and a fixed pay off date. You may be able to borrow as little as a few thousand dollars or six figures depending on your income, credit, and what you’re using a personal loan for.
There are two types of loans—secured loans and unsecured loans.
Secured loans are ones that are backed by collateral. Personal loans are typically unsecured products where you don’t have to put up collateral for the loan.
An example of a secured loan is a title loan, which is secured by your car. If you don’t pay the loan, they can take your ride. That would definitely be a problemo.
If you don’t pay a personal loan they won’t take your property, but you could get sent to collections or sued. Basically, if you take out a loan make sure you can pay it back to avoid some pretty nasty repercussions.
What a Personal Loan Can Be Used For
A personal loan can be used for a wide range of personal reasons.
Here are a few:
- Debt consolidation— Debt consolidation is a VERY popular way to use a personal loan. With a debt consolidation, you apply for a personal loan and get the lump sum in cash. Then you use that money to pay off your other debt like credit cards, etc. The fixed payment can make the debt easier to manage. Plus, personal loans can have better interest rates than credit cards.
- Home renovations or repair—A personal loan can get you the cash you need to make improvements to your home.
- Engagement, wedding, or special occasion—Need cash for a special occasion? A personal loan could be used. Just proceed with EXTREME caution. You don’t want to go into unnecessary debt. You should have a serious pay off plan and understand the long-term implications of borrowing. Also, do you want to take debt into a new marriage?
- IVF, adoption, family planning—IVF and adopting can be very expensive. A personal loan could be used to help you fund different procedures. Prenatal care and giving birth can also be costly. A personal loan can help you here as well.
The Type of Credit You Need For a Personal Loan
There are personal loan products for good credit and not-so-good credit.
Good credit is going to get you the very best deals on interest rates and fees. A competitive rate and low fees can make a personal loan much more affordable.
You can get approved for a personal loan with less-than-stellar credit. But that could also mean a double-digit interest rate and various application related fees. Ultimately, bad credit is expensive.
Here’s an example:
BankRate has a really sweet personal loan calculator. We did a break down of how much a loan would cost if you had a 5% interest rate and if you had a 16% interest rate.
Below is the 5% interest rate…
Compared to the 16% interest rate…
A competitive interest rate can get you A HUGE savings. Need some help improving your credit score so you can get a better interest rate? Check out this post.
The Typical Loan Requirements
Loan terms can vary. But you’ll typically see 12 to 60 months or 1 to 5 years. Rates can be different for different loan term lengths.
A longer loan term can give you lower payments, but that will also likely cost you more in interest over time. A short loan term will have higher payments, but you can take advantage of the interest savings.
Typically, companies will offer some kind of rate discount if you sign up for autopay. This is when the payment automatically withdraws from your account. Many personal loan companies will also now let you apply online. Some of which do a prequalification without a hard credit inquiry.
When shopping for personal loans, you need to look at:
- The interest rate
- Application, origination, and processing fees
- Overall cost… the lowest interest rate may not have the lowest overall cost so pay attention
- The fine print… Are there prepayment penalty fees? Will the company charge you if you pay the loan off early?
Personal Loans vs. Pay Day Loans
Before closing up, a word on pay day loans. Pay day loans are loans where you’re basically getting an advance before your paycheck comes around.
You pay a fee to borrow and you’re meant to pay back the money when your next paycheck comes. The problem with this product is typically people aren’t able to pay them back when the paycheck comes. Instead, they renew the loan for another fee and continue a cycle of debt.
Avoid this trap. If you’re in a pinch, an installment personal loan can be a safer product because it’s not tied to your paycheck and you don’t have to pay tons of misc. fees.
How to Shop for a Personal Loan
First, start with your credit union or bank. They may be able to set you up with a decent personal loan because you’re a loyal customer or member.
Then check the online personal loan marketplace for options. Shop around! This is a loan that you’ll have potentially for the next 1 to 5 years. You want to work with a lender you trust and you want to ensure you’re not getting roped into a bad deal.
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