Our reviewers evaluate products and services based on unbiased research. Top Consumer Reviews may earn money when you click on a link. Learn more about our process.
Sunday, February 5th
Most people would benefit from a sizable infusion of cash in their bank account from time to time. For more than 20 million people, their preferred source of much-needed cash has come from a personal loan. While credit cards, private loans from family members and other options are available, the reality is that the simplicity of applying for a personal loan online today makes this a convenient and appealing option for many people. Before you apply for your next personal loan, however, you should take a moment to understand more about this source of financing.
What Are Personal Loans?
A personal loan is an installment loan with a relatively short term. By making regular installment payments as scheduled, the loan may be paid in full within a few years. This makes personal loans appealing to those who need cash and who do not want to be burdened with debt that is difficult to get rid of.
Because of the flexibility of personal loans, people use them for a wide range of beneficial or essential purposes. Generally, a personal loan could help you to improve your financial situation, pay for a large expense over time, make necessary improvements to your house or accomplish other essential goals.
Perhaps the most appealing quality of personal loans, however, is the fact that they are easy to apply for. In fact, online personal loans typically have a short application that can be completed in a few minutes. You may learn of your loan approval status within a few hours or less, depending on the lender's processes. You may even have money from your loan deposited in your account within a few days or less.
Types of Personal Loans
Both secured and unsecured personal loans are available. A secured personal loan requires the applicant to pledge collateral. Typically, this may be in the form of a semi-liquid asset, such as a certificate of deposit or another asset. Because the loan is secured by this asset, the lender has the right to seize the collateral if you default on the loan. Generally, a lender may require you to pledge collateral if you have a lower credit score or if there are other concerns related to your qualifications.
An unsecured personal loan requires no collateral. The lender will base its approval decision entirely on your financial profile. This includes your credit scores, your payment history, your income and other related factors. Typically, an unsecured loan will have a higher interest rate than a secured loan. However, lenders also take into account a variety of other factors when determining your interest rate. These include your credit rating, the requested loan amount, the requested loan term and more.
Common Personal Loan Terms
Before you apply for a personal loan, you understandably want to ensure that you can afford to make the monthly payments. At the same time, you may want to compare terms offered by several lenders to find the best option available to you. Generally, personal loan term lengths range between 12 and 84 months, but there is some variation outside of this range. Longer loan terms are associated with lower monthly payments, but they may also have higher interest rates. Overall, you can expect your personal loan's total interest charges over the life of the loan to be higher if you select a longer term length.
Interest rates on personal loans vary considerably as well. You may be hard-pressed to find an unsecured personal loan with less than 10 percent interest. Depending on your financial profile and a variety of other factors, some personal loans have interest rates between 20 and 35.99 percent.
The loan amount that you qualify for will be determined by the lender based on your needs, how the funds will be used, your financial situation and even the loan program that you apply for. Some personal loans offer as little as $1,500, and they may offer as much as $100,000.
How Personal Loan Funds Are Used
You can take out a personal loan for everything from taking a nice vacation to buying new appliances for the kitchen. With many personal loan programs, the funds are deposited directly into your bank account and are yours to spend as needed. However, there are instances when a lender may require you to use the funds in a certain way.
Two of the more common reasons why people take our personal loans are for home improvement projects and debt consolidation. Home improvement loans often have larger loan amounts, and they may even be secured by the home as a second lien. Regardless of whether you take out a secured or unsecured home improvement loan, the lender may want to ensure that the funds go into the home. Because of this, the lender may pay vendors and contractors directly rather than give the applicant control of the funds.
The money from a debt consolidation loan is used to pay off other outstanding accounts. This may include medical bills, high-interest credit cards, student loans and more. In some cases, the lender will analyze an applicant's financial profile with the assumption that these debts will be paid off with the new loan. If this is the case, the lender may ask for proof that the debts have been paid in full. Otherwise, the lender may directly pay off the debts in question out of the loan proceeds.
Common Sources of Personal Loans
You can walk into most local financial institutions and apply for a personal loan directly. This includes banks and credit unions. Often, these financial institutions have online loan application options, but you may still be required to visit your local branch to submit documents or to sign paperwork.
Some lenders offer a completely online experience, which may be far more convenient for many busy people. Peer-to-peer lenders offer financing that is completely funded by investors. These are generally individual investors who are interested in generating investment income at a guaranteed rate of return in exchange for giving you the money you need. Usually, dozens of investors or more may pool funds together to make a single peer-to-peer loan.
There are also many reputable online lenders that specialize in providing a convenient application process for applicants. The entire application process is online, but you may be required to upload pay stubs, tax returns or other documents before your loan request can be approved. All documents are signed digitally, and the funds are wired or deposited into your account upon loan approval.
Alternatives to Personal Loans
A personal loan is an excellent option for many individuals who need funds for a wide range of reasons, but it may not be suitable for all purposes. If you require more money than a personal loan can provide, you should consider a cash-out refinance or home equity loan. These options use your home as collateral, so they may enable you to qualify for a higher loan amount with a more manageable monthly loan payment in some cases.
If you require less money, it may make sense to apply for a new credit card. Credit cards have a revolving loan term rather than an installment loan term, so they are more challenging to pay off. However, you may more easily qualify for a credit card than a personal loan. If you already have a credit card with a suitable available balance, accessing the funds you need may be as simple as pulling your credit card out of your wallet. Because revolving debt is more difficult to pay off, you should establish a firm repayment plan before using a credit card.
What to Do Before You Apply for a Personal Loan
When you apply for a personal loan, you will state the amount of money that you are interested in borrowing. Because you have this freedom, within the limits of the loan program, you should determine exactly how much money you need to borrow. For example, if you are applying for a debt consolidation loan, add up the payoff balances for all accounts that you want to pay off. You also should add up the accounts' monthly payments so that you set up a loan payment that you can afford.
Regardless of how you plan to use the loan proceeds, you must ensure that you can comfortably make the payments. If you do not already have an accurate, up-to-date personal budget, now is the time to prepare one. Factor in all expenses, including HOA dues, the kids' school lunches, medical expenses and others that you are responsible for and that may not immediately come to mind. Because you have the flexibility to adjust the loan term and monthly payment when you apply for a personal loan, preparing a budget will help you to make a smarter financial decision.
Learn More Today
Are you interested in applying for a personal loan? After you walk through these preliminary steps, you can conveniently start comparing loan terms before you apply online. Keep in mind that lending requirements vary. If you are not approved with the first lender you apply with, continue exploring your options.
Select any 2 Personal Loans to compare them head to head
Personal loan interest rates continue to fall for 3- and 5-year loans
Borrowers with good credit seeking personal loans during the past seven days prequalified for rates that were lower for both 3- and 5-year loans compared to the previous seven days. For borrowers with ...
Thu, 02 Feb 2023
The Motley Fool on ...
Dave Ramsey Says This Move Could Help You Avoid a Personal Loan
There's a reason consumers are often tempted to borrow money via a personal loan. These loans are known to offer competitive interest rates, and also, they let you borrow money for any purpose. Want ...
Fri, 03 Feb 2023
The Motley Fool on ...
What the Federal Reserve's Next Meeting Could Mean for Personal Loans
The Federal Reserve is meeting this week and could raise interest rates to keep battling inflation. If the Fed's benchmark interest rate rises, it could drive up the cost of personal loans. Anyone who ...
Mon, 30 Jan 2023