With some cautious planning, there are ways a personal loan can help you bring many of your biggest dreams into reality. Below are important things you should know about personal loans and what you should be aware of when looking for loans
What Is A Personal Loan?
A personal loan is an unsecured loan ranging from $1,000 – $100,000 always with a fixed interest rate that can be used to consolidate debt or make a large purchase. The term “unsecured” here means you don’t have to put up any collateral.
You may be able to qualify for a low-interest rate personal loan depending on your credit score, thereby enabling you to save money. Interest rates on personal loans are often much lower than the interest rates on other loans.
The interest rate on your loan will depend on several factors, which may include your credit score, credit history, monthly cash flow, and debt-to-income ratio. Also, the stronger your credit profile and history of financial responsibility, the lower the interest rate you can expect.
A personal loan can be used for anything. Some lenders and loan companies may ask what you plan to do with the money, but others will just want to be sure that you will be able to pay it back at due time. While personal loans aren't that cheap, they can be a major option in a variety of circumstances. Here's how to decide if getting a loan is a good idea.
How do Personal Loans Work?
Some kinds of loans are basically for a specific purchase. A mortgage loan is used to buy a home, you get an auto loan to purchase a car, in mortgage your home serves as the collateral. The same goes for an auto loan, the car you're buying will be the collateral in case you don't meet up when it's time for repayment.
However, a personal loan often has no collateral. This is why it is called an unsecured loan, there is no property that the lender or loan company could seize if you default on the loan, which means the lender is taking a greater risk and will most likely charge you a higher interest rate than it would with a mortgage or auto loan. Just how high your rate will be can depend on several factors, which have been mentioned earlier in this article.
Secured personal loans are also available in some cases. The collateral might be your bank account, car, or other property. A secured personal loan may be easier to qualify for and carry a somewhat lower interest rate than an unsecured one. As with any other secured loan, you may lose your collateral if you are unable to keep up with the payments.
Even with an unsecured personal loan, failing to make necessary payments at a due time can be harmful to your credit score and severely affect your ability to obtain loans in the future. Most companies behind the most widely used credit score, say that your payment history is the single most important factor in its formula, accounting for 35-40% of your score.
Why or when should you get a personal loan?
Everyone’s reasons for applying for a personal loan are different but before you apply for a personal loan, you'll want to consider whether there may be less expensive ways you could borrow. Some acceptable reasons for choosing a personal loan are; probably you don't have and couldn't qualify for a low-interest credit card or the credit limits on your credit cards aren't adequate to meet your current borrowing needs, after weighing all the options you realize a personal loan is your least expensive borrowing option or you don't have any collateral to offer.
Benefits of Getting a personal loan:
- Debt consolidation
Getting a personal loan can help you sum up your previous debts into a single payment. A personal loan used for debt consolidation purposes may help you repay what you owe more efficiently. Speak to a financial adviser to check if debt consolidation is right for you and work out your best options.
- Funding your education
Do you want to learn a new skill so you can land high-income jobs? A personal loan could help fund your education and help you get where you want to be in your career.
- Scaling your business
You can use a personal loan to get the equipment you need to help your business be more productive. Sometimes what you need is a bit of extra capability, a new computer, a new car for moving your goods, or new technology and you need it quickly. A personal loan might be a good way to help you get things sorted out in short order.
Other benefits include paying hospital bills, renovating your home, emergency expenses, and so on. We all have goals that require strong financial backing. Considering a personal loan can get you one step closer to achieving them but consider the rates and get repayment plans.