Definition of personal loan
What is a personal loan?
A personal loan is an amount of money that you can borrow to use for various purposes. For example, you can use a personal loan to consolidate debt, pay for home renovations, or plan a dream wedding. Personal loans can be offered through banks, credit unions or online lenders. The money you borrow must be repaid over time, usually with interest. Some lenders may also charge a fee for personal loans.
Key points to remember
- Personal loans are loans that can cover a number of personal expenses.
- You can find personal loans from banks, credit unions, and online lenders.
- Personal loans can be secured, which means you need collateral to borrow money, or unsecured, with no collateral required.
- Personal loans can vary widely in terms of their interest rates, fees, amounts, and repayment terms.
Understanding a personal loan
A personal loan allows you to borrow money to pay for personal expenses and then repay those funds over time. Personal loans are a type of installment debt that allows you to get lump sum financing. For example, you can use a personal loan to cover:
- Moving expenses
- Debt consolidation
- Medical bills
- Wedding expenses
- Home renovations or repairs
- Funeral expenses
- Vacation expenses
- Unexpected expenses
These loans are different from other installment loans, such as student loans, auto loans, and mortgages, which are used to fund specific expenses (i.e. education, vehicle purchase, and purchase of a car). House).
Some personal lenders restrict the ways in which you can use a personal loan. For example, you may not be able to get a personal loan to pay for tuition, fees, or other expenses.
A personal loan is also different from a personal line of credit. The latter is not a lump sum; instead, it works like a credit card. You have a line of credit that you can spend money against, and in doing so, your available credit is reduced. You can then free up available credit by making a payment on your line of credit.sese
With a personal loan, there is usually a fixed end date when the loan will be repaid. A personal line of credit, on the other hand, can remain open and available indefinitely as long as your account remains in good standing with your lender.sese
Types of personal loans
Personal loans can be secured or unsecured. A secured personal loan is a loan that requires some type of collateral as a condition of borrowing. For example, you can get a personal loan with cash, like a savings account or certificate of deposit (CD), or with a physical asset, like your car or boat. If you don’t repay the loan, the lender might keep your collateral to pay off the debt.
An unsecured personal loan does not require any collateral to borrow money. Banks, credit unions, and online lenders can offer secured and unsecured personal loans to qualified borrowers. Banks generally consider the latter to be riskier than the former because there is no collateral to collect. This can mean paying a higher interest rate for a personal loan.
How a personal loan works
To get a personal loan, you need to apply from a lender. Again, this could be a bank, credit union, or online personal lender.
Usually, you must first complete an application. The lender reviews it and decides whether to approve or deny it. If approved, you will receive the terms of the loan, which you can accept or decline. If you accept them, the next step is to finalize your loan documents.
When this is done, the lender will fund the loan, which means you will pay the proceeds. Depending on the lender, these can arrive by direct deposit to your bank account or by check. Once the loan is funded, you can use the money as you see fit. You must then start repaying the loan according to the terms set out in your loan agreement.
Failure to pay on a personal loan could cause significant damage to your credit score. You could also lose your collateral with a secured loan or risk being sued by your lender to collect the debt.
Personal loan example
When considering a personal loan, it helps to understand how much it can cost. The annual percentage rate (APR) of a personal loan represents the annualized cost of repaying the loan based on the interest rate and fees. The APR and the term of the loan can determine the total amount of interest you pay over the term of the loan.
For example, suppose you get a personal loan of $ 10,000 with an APR of 7.5%. The loan has a repayment term of 24 months. Using these terms, your monthly payment would be $ 450 and the total interest paid over the life of the loan would be $ 799.90.
Now suppose you borrow the same amount but with different loan terms. Instead of a two-year term, you have three years to repay the loan and your interest rate is 6% instead of 7.5%. Using these terms, your monthly payment would drop to $ 304, but the total interest paid would increase to $ 951.90.
It’s important to compare the numbers this way if you want to get the lowest possible monthly payment or pay the least amount of interest on a personal loan. Using a simple online personal loan calculator can help you determine the type of amount and interest rate that best suits your budget.sese
While some lenders charge no fees for personal loans, others may charge a credit check fee, loan origination fee, or, if you decide to pay off the loan sooner, a prepayment penalty. Late payment may result in late fees.
Where to find personal loans
The first place to look for personal loans may be your current bank or credit union. Your personal banker can advise you on the types of personal loans available and the borrowing options for which you are most likely to qualify.
Personal loans can also be found online. Many lenders offer personal loans online. You can apply electronically, get a decision in minutes, and in some cases get funding as little as 24-48 hours after loan approval.
When comparing personal loans online or offline, pay close attention to the details. Consider more specifically the following:
- Interest rate
- Repayment Terms
- Borrowing limits (minimum and maximum)
- Warranty requirements
You can check your credit report for free at AnnualCreditReport.com. As you do this, look for errors that could hurt your score and feel free to challenge them.
It is also helpful to check the minimum requirements to qualify for a personal loan. Lenders may have different credit score, income, and debt-to-income ratio requirements that are acceptable to be approved for a personal loan. This can help you choose the loans that best match your credit profile and financial profile.