What is a Personal Loan?
If you don’t have money for a large purchase and want to spread out the payments, personal loans allow you to borrow money and pay it back over time. These types of loans can come in handy for financing expenses like college tuition or the purchase of a home or car.
Types of personal loans
Personal loans can be unsecured or secured loans. They may also have a fixed interest rate or a variable interest rate, depending on the terms of the loan. Depending on the type of expense you’re financing, personal loans can fall under home loans, auto loans, and student loans.
Most installment loans you take out for yourself are personal loans. Installment loans typically have a fixed rate and term in addition to set monthly payments.
Unsecured personal loans
Lenders may use your financial history, credit report, and financial information to determine if you qualify for an unsecured loan. These loans don’t require borrowers to put up collateral as they rely on your credit standing.
Secured personal loans
Collateral is required to receive a secured personal loan. Collateral can be a physical asset or valuable such as a house or car. A home equity loan is one type of secured personal loan, because the lender can use your house as collateral if you don’t meet the repayment terms.
A debt consolidation loan can help consumers streamline their debt into one payment instead of multiple payments.
With a debt consolidation personal loan, borrowers will take out a new loan to pay off all of their individual existing debts. Instead of paying off different accounts with different interest rates and payment requirements, the borrower will pay off one loan with one interest rate. It’s common for borrowers to combine their credit card debt into a single debt consolidation loan, but other types of debt may be involved too.
What are personal loans used for?
Personal loans can be used for just about anything. There are often limited restrictions for how a consumer can use their loans funds. Personal loans give consumers the money they need in one lump sum.
According to an article published by the Federal Reserve Bank of St. Louis, many consumers use online unsecured personal loans for debt consolidation and credit card payoff.
Personal loans are also used to finance large purchases or unexpected expenses. Depending on a consumer’s needs, this can be for a home repair, car repair, or medical bills. In an Experian survey, 28% of respondents said they used a personal loan for a large purchase and 17% of respondents said they used one for a home improvement.
How much can I borrow with a personal loan?
The amount of money you can borrow with a personal loan can vary. If you have a bad credit score, you may not qualify for a large loan amount.
The average balance of a new unsecured personal loan in the second quarter of 2020 was $6,690, according to TransUnion’s quarterly Industry Insights Report.
What’s the interest rate on a personal loan?
There is no standard interest rate for personal loans and the rate for your personal loan can vary. Lenders set their own rates. The average commercial bank personal loan interest rate for August 2020 was 9.34%, according to The Federal Reserve.
At credit unions, the average interest rate for an unsecured 36-month fixed-rate loan was 9.21% in September 2020.
Personal loan rates can depend on factors such as the loan amount, credit history, length of the loan, debt-to-income ratio, and your overall financial situation. Generally, the better your credit score, the more favorable loan terms you will receive, such as access to lower interest rates.
Aside from interest payments, lenders may also charge origination fees, application fees, and prepayment penalties as part of your loan’s annual percentage rate.
How do you get a personal loan?
Finding the right personal loan can give you the best interest rate and loan terms. Shop around for the best personal loan that suits your financial situation.
Lenders may check your credit history to determine your creditworthiness, which will tell them the likeliness of you paying the loan back. Some lenders may have strict qualifications for borrowers and require specific credit scores.
Just about all lenders will at least look at your credit history when reviewing your loan application. For this reason, it’s best to obtain a free credit report at AnnualCreditReport.com to better understand your credit history before applying. Checking your credit report in advance can help you figure out what type of loans and rates you may qualify for. Checking your credit report will not impact your credit score.
When will I get the money for my personal loan?
Every lender will have its own approval process for funding a personal loan. Some lenders can deposit your funds as soon as the next business day or even the same day. Typically, it will take a couple of days for a loan application to receive approval and for funds to show up in your bank account.
Will a personal loan impact my credit score?
A personal loan can affect your credit score. Depending on the lender and the application process, your credit report may be pulled for a hard credit inquiry or soft credit inquiry. A hard credit inquiry can lower your credit score. A soft inquiry doesn’t impact your score.
A loan can show up on your credit report, depending on the type of personal loan and the lender. The lender can report positive and negative repayment history to one or all three major credit bureaus (Experian, Equifax, and TransUnion). Borrowers can build their credit history if the lender reports on-time loan repayments. Missing a loan payment can hurt your credit score. The loan will diversify your credit mix, which also impacts your credit history.
Where do I get a personal loan?
Personal loans commonly come from banks, credit unions, and online lenders.
Borrowers with excellent credit will have the most choices when it comes to qualifying for a personal loan. Just because you have a low credit score doesn’t mean you won’t be able to find a loan for your financial situation.