There may be a time in every consumer’s life when a personal loan is the best option. There are many reasons a consumer might choose to take out a personal loan. These could include buying a car, financing a wedding, consolidating debts or going on vacation with the family.
It is important to fully understand the process before getting into debt. There are many loan products on the market that can be tailored to different situations and purposes. The first step to borrowing is understanding how they work. This guide will help you understand some very important loan facts.
A loan is a financial contract in which one party (the lender) agrees that they will lend money to the borrower for a specified amount of money. The lender also agrees to repay the loan regularly over a time period.
The loan will be charged interest at a set rate, with additional fees for administration. Although the terms and conditions of each loan will be specified in the contract, they may vary from lender-to lender. The contract must be adhered to by every borrower, including the interest payment and repayment dates.
Although companies package their loans differently, there are two main types of loans: secured and unsecure. Secured loans require that the borrower provide collateral (usually his house) to secure the loan. An unsecured loan, on the other hand is open to anyone with decent credit and a job.
How Do Personal Loans Work?
The process for getting a personal loan is now much simpler. Lenders used to first need to check your credit score and tax returns, as well as your employment details, many years ago. Then, they’d decide if or not to lend you money and at what interest rate.
A new breed of lenders has emerged that have moved away from the traditional route. These lenders now consider factors such as your SAT scores and social accounts in determining if you are eligible for a loan. This has significantly made it easier for borrowers to get personal loans than in the past when banks and credit unions were all they had.
Personal loans come in a variety of sizes (amounts of principal) as well as terms (term lengths). While some loans may last for a year, others such as payday loans, are due within a few weeks. You don’t need to pay interest if you pay off a payday loan in the given time frame. However, you will have to pay an origination fee.
Other forms of personal loans such as installment loans start to accumulate interest from day one. The amount of the loan and its interest rate will determine the monthly interest payments. If you choose to extend your loan term, some lenders will offer lower interest rates.
You can use a personal loan calculator to determine which interest rate is more affordable between terms. The lower rate for a longer term can be compared to the higher rate for one that is shorter. It is best to not borrow more money than you can afford.
The Best Personal Loans Sources
Traditional banks, credit unions, and online lenders are the best places to obtain personal loans. You can get a loan that is fair and within your budget.
You have a good relationship with a bank and credit union. They are the best alternative to 0% APR cards. You may be eligible for special loans that have special terms and privileges depending on how long you’ve been a member of their bank or credit union.
An online loan application is much easier than you might think. You can fill out an online form if your bank offers are not suitable for your needs, or there aren’t any banks nearby.
These are the names you may have heard of when it comes personal loan programs: US Bank. Wells Fargo. Capital One. You may have already transacted with one or more of these banks. Because you trust them, borrowing from them would be more appealing.
You don’t have to look at the banks that are big anymore. Online banks offer nationwide service and offer a wide range of loan products.
Many options are available to big banks. You have the option to choose your terms (length, fees, incentives and any other offers). It will be easier to find a loan that suits your needs and preferences. These banks offer conveniences for borrowers like online bill payment and 24/7 customer support.
Sometimes big name doesn’t necessarily mean great service. It may not be easy to speak to a manager at a bank or loan officer by phone or in person. They might refer your account, in some cases to a lower-ranking employee or an inexperienced agent.
They may not be able to grant exceptions, or they might have to adhere to strict guidelines regarding credit scores and borrower eligibility. If you have poor to fair credit, it will be more difficult for them to approve you for a personal loan.
General Information and Conditions
Here are some additional details about borrowing money from a bank
- Banks are more likely to require higher credit scores than other lenders. Two-thirds of bank personal loans are granted to borrowers with credit scores of at least 661 (See our guide on how to improve credit score).
- While many banks don’t disclose their credit score requirements, a small number of them do. TD Bank is one of the few that says they will approve personal loans to borrowers with a credit score above 680.
- Banks are more likely to approve larger loans because they tend to lend less risky borrowers.
Despite being able to issue smaller loans than banks, credit unions are still at the forefront in the personal loan market. A credit union is different from a bank because of its membership. To be eligible for a loan, you must be a member.
Credit unions typically charge lower interest rates than banks, on average. Their location is another advantage. If you have any questions, you can simply drop by your branch to speak face-to-face and get answers. A credit union offers many benefits to borrowers, including the ability to modify your loan terms and conditions to better suit your needs.
While you might be able to pay online and check your loan balance, it may not work for credit unions. Some credit unions are still old-fashioned and have not invested in this technology. The number of products and services that smaller credit unions offer is usually lower than those offered by larger ones. Check to make sure your credit union has the product you need.
Here are some additional details about borrowing from credit unions:
- Credit unions are more likely than banks to approve loans to borrowers with bad credit ratings. TransUnion reports that more than half of personal loans from credit unions go to borrowers with credit scores below 660. Subprime borrowers, or those with credit scores below 600, received 25% of these loans.
- Credit unions are a non-profit organization, so lending decisions and policies are largely influenced by their institutional mission.
Online Money Lenders
Are you looking for a way to get a loan online? Online lenders make it easy to get a loan fast. Sometimes, you can even have the money in your account within the next day. There are many things you need to think about before applying for a loan.
Online lenders are trying to stand out from traditional lenders due to the fierce competition in the personal loan market. Many of these lenders offer innovative lending models that bypass traditional credit-scoring models and offer extras like flexible payments, waived charges or schemes to lower the interest rate during repayment.
SoFi and Earnest are online lenders that focus on strong credit borrowers. They offer high loan amounts and low interest rates. Credit scores between 690 and 719 are considered ‘good’, while scores above 720 are considered ‘excellent’. (See how credit scores are calculated).
Others lenders will try to find borrowers with poor credit. Avant and LendingPoint, are two examples. Although rates will be higher, it is easier to get approval if you have a good credit score (630 to 689) and a bad one (300 to 629).
What About Bad Credit Borrowers?
These options are available to borrowers with poor credit:
- Locate an online lender that accepts borrowers with poor credit ratings. They may also consider non-traditional factors such as earning potential when making decisions.
- Secured personal loans available. You will need to provide security such as your car or a certificate de deposit.
- Co-sign your loan application with a friend. A friend or relative with excellent credit may be able to help you get a loan or lower interest rates. Your co-signor must pay the loan if you do not.
It is quick and simple, with minimal paperwork. Simply enter the information and wait to receive approval. This is the best option for people with poor credit, as these lenders are able to work with anyone with credit.
These lenders might charge outrageous interest rates. You should not be surprised to find out that some lenders charge 100% APR or more. It can be difficult to get out of a trap once you’re caught. The fees will continue to mount up. It is better to exhaust all options first in most cases.
Personal loans can be used for almost any purpose. They can pay for your wedding, honeymoon, home renovations or even fly around the globe. A personal loan can have lower interest rates than a credit card depending on your credit history, but that is not always the case.
They can be safer than other financial tools because they simplify the process of paying down your debt in equal monthly installments.