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Wednesday, September 28th
Obtaining a personal loan may make it possible to consolidate debt or pay an emergency medical expense. Typically, personal loans come with fixed interest rates and a fixed repayment schedule. Furthermore, they are often made available to most borrowers regardless of their credit scores. Let's take a closer look at what else you should know about personal loans before you apply for one.
Where Can You Get a Personal Loan?
Most financial institutions offer personal loans that you can apply for in person or online. As a general rule, credit unions tend to offer lower interest rates compared to local or national banks. They also tend to offer the best terms to those who have average or excellent credit. Of course, the exact terms that a lender is willing to offer will depend on a variety of factors such as your borrower profile, market conditions and lender policies.
Ideally, you will get loan offers from multiple lenders before you actually submit an application. Typically, lenders will make tentative offers based on a soft pull of your credit report. A soft pull generally has no effect on your credit score. When you submit an application for full evaluation, a lender will usually conduct a hard credit report inquiry. A hard inquiry may reduce your credit score by several points, and multiple inquiries may be seen as a red flag by some financial institutions.
How Long Does It Take to Apply for a Personal Loan?
If you apply for a personal loan online, you should be able to complete the process within a matter of minutes. You'll typically need to provide basic information such as your name, address and employment status. This will be used to confirm your identity and evaluate your ability to repay loan proceeds in a timely manner. Identifying information will also be necessary to ensure that a lender runs a credit check on the right person.
You will also likely be asked to disclose your annual household income as part of the application process. If you are over the age of 21, you may be allowed to include any income generated by a spouse, parent or friend that you would have reasonable access to. In addition to wage income, you can usually include bonuses, royalties or other income that you expect to generate throughout the year as part of your annual earnings.
It's possible that you'll receive a loan decision within minutes of submitting your online application. However, some lenders will take up to 10 business days to evaluate your application and make a decision. If you submit your application to an online portal, it may take up to 24 hours for individual lenders to receive it and get back to you.
In the event that you submit a paper application, you should expect to wait several days to receive a response to your request for funds. You will likely receive a phone call or letter in the mail after a decision has been made.
Who Typically Qualifies for a Personal Loan?
In the past, a personal loan was generally reserved for someone who had poor credit or no credit history. However, over the past decade, personal loans have been designed for people who have excellent credit and who are looking for an affordable way to obtain large sums of money in a short period of time.
This type of loan product can either be secured by collateral or unsecured. Typically, unsecured personal loans are reserved for those who have good credit scores or for those who show an ability to repay loan proceeds in a timely manner. However, as secured loans typically come with lower interest rates, it may be in your best interest to consider providing collateral regardless of your risk profile.
How Much Money Can You Expect to Borrow?
Personal loan amounts vary based on the type of lender you choose to work with. For instance, credit unions may allow you to borrow up to $5,000 while an online lender may allow you to borrow up to $35,000 or more. It's worth noting that you should know ahead of time how much you need to get yourself out of a financial dilemma before applying. This can help to prevent you from borrowing more than you can afford to repay, which can create a secondary financial hardship.
What Are the Typical Repayment Terms?
Personal loans are typically repaid over a period of no longer than 60 months. However, specific financial institutions may be willing to offer a longer repayment term if it makes sense to do so. Ideally, you'll pay the loan back as quickly as possible to minimize the amount of interest your lender earns.
Interest rates can vary from as low as 5% to as high as 30% depending on your credit score and creditworthiness. Creditworthiness takes into account variables such as your debt-to-income (DTI) ratio, income and other factors that might impact your ability to repay a loan. Often, interest rates go up as the loan's term increases, and this is because there is a greater risk of a default the farther you go out in time.
Your payment is typically due on the same date each month, and it may be possible to change that date after your loan is approved. You may be charged a late fee, a penalty interest rate or other fees if you make a late payment or miss a payment altogether.
There is also a chance that you could lose the collateral used to secure the loan if you can't make payments as stipulated in the loan agreement. If you don't think that you can make a payment on time, it's in your best interest to contact your lender as soon as possible.
What Do Lenders Typically Accept as Collateral?
Generally speaking, you can use anything that you own to secure a personal loan. For instance, you could permit a bank to seize your home, car or art collection to recoup its losses in the event that you default on the deal. If you get a loan from a bank or credit union that you already have an account with, you can use that account to secure the loan.
In such a scenario, the financial institution would take funds out of your checking or savings account to make up for any late or missed payments. If you have a brokerage account with a company that also makes personal loans, you may be able to use the value of that account as collateral. If you fail to make payments on time, a portion of your portfolio will likely be liquidated to bring your account from past due to current.
A Quick Note About Personal Loans and Payday Loans
It's worth noting that payday loans are sometimes referred to as personal loans. While they may technically have the characteristics of this type of product, it's generally in your best interest to avoid payday loans. This is because payday lenders charge interest rates as high as 400% on balances of $1,000 or less.
The key difference between a traditional personal loan and a payday loan is that there is generally no minimum income or credit requirements to obtain a payday loan. Therefore, if it seems like it's too easy to get the cash that you need, you may want to avoid that lender. This is because you may be receiving cash that you can't afford to repay in a timely manner, and in some cases, which can be worse than not getting any money at all.
It's Fast, Safe, and Easy
If you are in the market for a personal loan, you'll likely find that it is relatively easy to find a lender offering terms that fit your needs and budget. Typically, you'll be able to obtain loan approval minutes after submitting an online application, and in many cases, you'll have your money within hours or days. If you have any further questions about this loan product, it may be a good idea to ask a financial adviser or a representative from your preferred financial institution.
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