Thousands of people taking personal loans for their purchases – may it be small or big ones – every day, and I bet you’re one of them, too.
Whether it’s purchasing a house or a car, paying for college or medical bills, personal loans enable millions of people around the world to meet any cash shortfall they experience.
But, if you are new to the credit world and are curious about loans, it’s a good start to understand the most common loan of all – personal loan. Read on to learn more about the basics of a personal loan.
What are personal loans?
A personal loan is an unsecured loan available to anyone, as long as the person is eligible. You can get it from banks or a non-banking financial company, such as private lenders and credit unions, to meet their personal needs.
Since personal loans are unsecured, approval is based on criteria relevant to your personal circumstances and financial status such as your income, credit history, employment history, capacity to make the repayments, among others. They are not tied on any of your personal assets like your home or vehicle or jewelry, as collateral.
On the other hand, secured loans require you to have any valuable asset as collateral. The lender can seize your property or any asset you put up as collateral if you cannot make the repayments. Because there is no guarantee to a personal loan, the interest rate is usually higher than those on secured loans are. There is greater risk with personal loans.
However, remember that it is not good to default on a personal loan. Like any other type of loan, any missed payments or default would reflect in your credit report. A bad credit can result to problems when you apply for other loans or credit cards in future.
Purpose for Personal Loans
You can use personal loans for just about anything you need. The lender will not monitor you on how you used the money.
You can spend it for home renovations, wedding expense, a family vacation, your kid’s education, latest gadgets or home appliances, unexpected medical expenses, or any emergency costs.
A personal loan can also be used for investment in business, pay bills, cover for car repairs, and much more.
How to qualify?
The eligibility criteria can vary from lender to lender. To qualify for a personal loan, you must be at least 18 years old, have a stable job or income, you must be capable to repay the loan, and place of residence must be verifiable.
As with any type of loan, the most important requirement is a regular source of income. Whether you are a salaried individual, self-employed businessperson or a professional, your income is the basis for determining whether you can afford the loan or not.
Your employment history is as important, too. Lenders will check how long you have been employed. Most lenders require you to be at least employed for two years by your current employer.
Your credit record is also a crucial basis. Lenders will see how well you make repayments on your past debts and loans. Since personal loans are unsecured, lenders require you to have a good credit score for you to get one.
Features of Personal Loans
The amount you can borrow with a personal loan is anywhere from £1,000 to £50,000, which depends on the lender and your personal circumstances. In general, if you have a good credit score and the higher your income, you’ll qualify for a much higher loan amount.
Personal loans are a one-time loan. They’re not a revolving credit like credit cards. With credit cards, you get a certain amount. You can use as much as you can. Once you repay it, you can borrow the amount repeatedly. With a personal loan, your repayments reduce the balance of the loan, but don’t open up available credit that you can borrow again.
Once you pay off the full amount of your personal loan, you’ll have to go through the application process again. The total loan amount includes the interest and fees, it’s the end of it. If you need to borrow again
Fixed Interest Rates
Interest rates can be either fixed or variable, and personal loans usually have fixed interest rates. This means it is locked on the agreed rate and it doesn’t change for the entire span of the loan.
The interest rates on personal loans depend on your credit rating. Low interest rates are reserved for those who have good credit scores. Lower interest rates simply mean cheaper loans.
Variable interest changes periodically and some personal loans that come with this type of interest. With a variable interest rate, your payments can fluctuate as your rate changes. You may benefit if the rate goes down, but pay more if it increases, making it harder for you to budget for your loan payments each month.
Fixed Loan Term
If you apply for a personal loan, you will have a set period to repay it. Loan periods are usually stated in months. Longer loan terms lower your monthly loan repayment, but you will be paying more interest. You might be as well be aware that some loans charges a fee if you pay your loan early.
Personal loans affect your credit score.
Every time you take out a loan, the lender reports your loan account details to the credit bureaus. Every detail will be recorded. From applying for a loan, which means a new inquiry on your credit report, if you are accepted or rejected, to how promptly you make the repayments will affect your credit. If you want to maintain a good credit score, make your loan payments on time each month.
Lenders are all over the place, but watch out for scams. Watch out for lenders who’ll approve you right away without doing any credit check especially when you have a bad credit history. It’s a red flag.
Avoid any lender who asks you to send money especially through wire transfer or prepaid card to secure the loan. Read reviews about the lender and learn more about its reputation. Many fraud lenders are online, so make sure the lender you are working with is authorized.