What Is A Personal Loan?

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What Is A Personal Loan

You should know what a personal loan is before taking one out. If you’re strapped for cash, perhaps you’ve thought of borrowing money for necessities or luxuries. That is why you should know about these debt options and their aspects such as personal loan rates. You should also know the qualification requirements and the available varieties.

There are personal loans for all your needs and numerous outlets to request them from. Once you’ve given them their required documents, you will eventually be given your loan. Make sure to make diligent payments when borrowing money, as failure may impact your credit rating. It affects loan terms and your long-term financial health.

Overview of Personal Loans

Personal loan

A personal loan is an amount of money that people borrow from credit unions, banks, or online lenders. It requires monthly payments that have varying interest rates. Most aren’t secured, meaning your assets aren’t risked as collateral as a penalty. Still, unsecured personal loans affect your credit score found on your credit report. 

If you make diligent payments, the rating increases, but it decreases if you’re late. In turn, this affects your likelihood to access services and take out more loans. In fact, personal loan interest rates and other loan conditions are determined from your credit history. That’s why you must make sure to complete payments diligently.

You may use personal loans for all kinds of purposes. For instance, you may take out auto loans for a brand new vehicle or a small business loan for your startup. On the other hand, more essential needs like higher education may be accessed by taking out student loans. 

These are virtually ubiquitous, but conditions such as personal loan rates depend on several factors.

How to Qualify for a Personal Loan

In order to verify your eligibility for personal loans, you must first check your credit report. If lenders check your credit rating, it’s usually by a hard credit check that may lower it. However, checking it by yourself is considered a soft credit check, so your credit report won’t be affected. Your credit score must be 690 or higher to qualify for personal loans.

Get Credit Report

Credit report

If you have poor credit, you may receive high interest rates and other unfavorable loan terms. On the other hand, having excellent credit means you’re qualified for the lowest rates and other lenient conditions. 

Consequently, you may want to improve your credit before taking out a loan. For example, you may take out a credit builder loan that helps increase your credit rating.

Check Available Lenders

You must find all the lending options available and find the one that suits you best. You may ask your local brick-and-mortar lender for their available offers. Moreover, you should check online as they even have tools that facilitate loan application. 

You may also check if they stipulate the prepayment penalty, origination fees, and other repayment terms.

Proceed With Prequalification

After selecting the best lenders, it’s time to ask them for prequalification. This involves filling out a form and having a soft credit check. With it, your lender will decide your eligibility and determine your terms such as personal loan rates. You may receive results within the same business day or a few days after.

Gather Required Documents

Personal loan requirements

After approval, you must provide the documents needed for the actual application. These typically include your identification, such as a driver’s license or a passport. 

You must prove your home address usually with lease agreements. Lastly, you must verify your source of income with files such as income tax returns.

Finalize The Loan

Upon approval, you will receive the agreement for the loan. Read and understand the fine print thoroughly, and ask to clarify any info in the agreement. 

If you’re certain about the conditions, you may sign the agreement. You may receive the loan on the same day or several, depending on your lender.

Types of Personal Loans

As we’ve mentioned, there are various personal loan options available to suit every need. There are short-term personal loans you may take out for urgent needs. You may even request for a second-chance loan if you suffered a personal tragedy. In fact, even those with no credit or poor credit have options specifically for them.

In addition, there are those with specific requirements that may have better personal loan rates. For instance, you may borrow from your home’s equity: its current value minus your existing mortgage. It can be taken as a hefty personal loan or smaller amounts from a line of credit. Military personnel have exclusive access to military payday loans 

Are Personal Loans Better than Credit Cards?

Personal loans vs credit cards

Aside from personal loans, credit cards may also be used to borrow money. Which one you use will depend on your personal needs, as both have distinct pros and cons. Generally, personal loans are better for borrowing sizable amounts. In contrast, credit cards are typically used for smaller, day-to-day expenses.

Personal loans are better for expensive purchases like homes and cars. After all, they usually have lower interest rates compared to credit cards. They provide you a lump sum, but you may have to pay for origination fees and other payments. Worse, some may be secured, meaning you risk losing your home or your car.

On the other hand, you’re only required to pay credit cards when you use the funds. Those with bad credit may use it to improve their rating, while those with better credit get the best terms. Having excellent credit allows you to increase your credit limit. However, beware of the higher interest rate that easily accumulates interest over time.