Planned life events and unexpected expenses may require more funds
than you have on hand. Being able to cover these situations often means using a
credit source to help you finance the amount you need. A personal loan can be a
fast, convenient and simple option to get some extra money. This informative
guide to personal loans will walk you through the basics as well as how to apply for a loan when you need it.
What is a personal loan?
A personal loan is a lump sum of money you borrow from a lender
and repay over a set amount of time or term. The fixed payments, also known as
installments, are based on the length of the term and include interest the
lender charges based on your Annual Percentage Rate (APR). The cost of the loan
will depend on your credit history and income, plus the specifics of the loan.
What can the funds be used for?
Personal loans are used to cover a variety of expenses and
purchases. While loan use is as individual as the person borrowing the funds,
there are some common reasons that people tend to take out a personal loan.
Typical loan purposes include:
• Debt consolidation
• Auto repair or replacement
• Wedding costs
• Medical/dental bills
• Adoption fees
• Emergency expenses
• Appliance purchase
• Funeral expenses
• Veterinary bills
• Seasonal expenses
• Tax payment
Lenders may ask you what loan funds
will be used for to ensure you are applying for the right loan option and amount.
A lender may also take the loan purpose into consideration for approval or to
draft terms of your loan offer.
Types of personal loans
There are two primary types of
personal loans: secured and unsecured. A secured loan is backed by collateral
provided by the borrower to make the transaction less risky for the lender.
Because the loan is secured by collateral — like a car, property— the interest
rate tends to be lower. If the borrower fails to pay off the loan, the lender
keeps the collateral. An unsecured loan does not have a collateral requirement.
Loan approval may be based on creditworthiness, debt-to-income ratio, credit
history and other risk-based factors. Because the loan is not secured by
collateral, the fixed interest rates tend to be higher on unsecured personal
loans versus secured loans.
How does a personal loan work?
The loan process begins when a borrower requests an amount from a
lender and submits an application. If the loan is approved, the borrower
receives a one-time payment for the approved amount, which is usually either a
direct deposit or a check. The borrower pays back the amount they were given —
known as the principal — plus interest charges and any fees charged by the
lender. When a personal loan is granted, the borrower signs an agreement that
outlines the costs of the loan, the repayment term and the set payment amount.
A personal loan can typically be repaid in full any time during that term
without any prepayment penalty fee.
Shopping for a personal loan
It’s best to have a clear purpose for taking out a loan. This will
help you stay focused while you’re comparing your loan options. Before you dive
into your search, you can prepare by checking your credit score to get an idea
of where you stand. You can also get your credit report for free once every year
Many institutions offer personal loans, including online lenders,
banks and credit unions. Once you’ve determined how much you need, things to
consider before selecting a lender include:
• Annual percentage rate (APR), which includes any fees you’ll pay
• Repayment terms that fit your budget
• Customer service features, such as available hours and
flexibility to reschedule payments
• Whether the lender makes loans for certain reasons, like debt
• The fine print, as in penalty fees, whether payments are reported
to credit bureaus and if you can set up automatic payments
Boosting your approval odds
If you’re concerned about whether or not your loan application
will be approved, there are steps you can take to improve your chance at
approval. Boosting your credit score with on-time bill or credit payments and
keeping your credit utilization low can have a big impact. Other ways include
keeping your debt-to-income ratio as low as possible by paying down your existing
debt or asking a co-signer with a strong income to apply with you.
How to apply for a personal loan
When you get ready to apply, make sure you have the documentation
you’ll need to verify your identification, income and residence.
What you may need to apply:
• Personal ID (like a driver’s license, passport or Social Security
• Proof of income (like a W-2, paystubs or tax documents)
• Your employer’s information
• Proof of residence (like a utility bill or a renter’s agreement)
Repaying the loan
It’s important to only take out a personal loan for the amount you
need and take a close look at the affordability of the loan. Having a loan
balance for a longer term means you pay more in interest, which increases the
overall cost of the loan. Lenders can require you to make monthly payments, but
you can always choose to pay more on your loan each due date to pay it off
sooner. Make sure that your payments will fit into your budget before accepting
any loan. If you are unsure about what your budget can handle, it may be a good
time to check in. Financial experts recommend a 50/30/20 budgeting guide: 50%
of your earnings on necessities, no more than 30% on things you want and 20% on
debt repayment and savings. There are also other helpful apps and tools to help
you track and manage your income and spending.
Many lenders offer convenient automatic payments, or autopay. If
you choose to set that up, payments will be deducted automatically from your
linked checking account. Besides making it easier to make your payments on
time, some lenders also reward borrowers who use autopay by giving them
interest rate discounts.
Why choose a personal loan over other forms of credit?
Personal loans are a common
alternative to credit cards and can be a better way to pay if you want to avoid
ongoing debt. Like credit cards, a personal line of credit is a revolving
credit product, meaning you can pay off what you borrow and continue to have
access to credit up to a maximum amount. These types of options typically have
a variable interest rate that can be increased by the lender. If you have an
immediate need, a fixed-rate personal installment loan can help you access the
extra money but have the flexibility to repay the amount over time with
payments that stay the same. Taking out a personal loan and making your
payments on time could also be helpful if you are building credit or working to
improve your credit.
If you are looking for a personal
loan, Lendmark Financial is here to help. We can talk you through the options
available to you and answer all your questions. Reach out to your local branch
or get an application started here.