Lack of enough money is something that most people go through now and then. When dealing with such difficulties, the first thing that runs through most people’s minds is a personal loan.
According to TransUnion, the number of individuals with private loans is more than 27 million. In 2016, the personal loan was termed the fastest rising product in the lending sector.
Every year, millions of Americans use personal loans to repay debts and handle unexpected expenses, among many other activities.
You would ask why people are after personal loans instead of the typical loans offered by banks and lending institutions. The truth is that personal loans take a short time to process as compared to a bank loan, which takes even days to request.
Also, this specific loan provides smaller fixed figures compared to other types of loans and thus making it a perfect solution for most emergencies. If you’re reading this article, most likely, you’re planning to borrow a personal loan.
But you are scared because you don’t know how the loan works. Without saying much, here are some things you should know before putting your signature on the dotted line for the credit to be processed.
- How the loan works
- Types of personal loans
- Where to borrow a personal loan
- When to take the loan
- Impacts on your credit score
- Rates/fees applied
- A personal loan is a short-term solution
- Risks involved
1. How the loan works
Before signing any documents, you must understand that this loan works in terms of installments.
That means you borrow a fixed amount and then pay through monthly installments. The payment amount is usually divided within the given period, ranging from one month to even seven years. The lender usually opens an account, and it’s closed immediately after you clear your loan.
When requesting some financial support, it’s essential to evaluate if your ideal option is the one. For instance, a personal loan may be readily available, but it’s not always the perfect option based on the financial situation.
2. Types of personal loans
When borrowing a personal loan, you must consider the two categories offered by the lending institutions. They include;
Unsecured personal loans
As their name suggests, these types of personal loans don’t necessarily require to be backed by collateral. Here, it’s the lender who decides if you qualify for the loan or not. The lender uses your financial history to make the decision.
Online lending institutions most commonly offer unsecured personal loans.
Secured personal loans
This loan is usually backed by collateral, such as your savings or physical items. When it comes to a secured personal loan, the lender has a right to claim your assets if you cannot settle the loan as per the arrangement.
3. Where to borrow a personal loan
By now, you must be asking where personal loans can be acquired. They are loans like others, meaning they can be borrowed from banks. Banks are usually the first thing that rushes through people’s minds whenever the topic of this kind of loan is mentioned.
However, they aren’t the only players in the industry offering this line of loans. You can borrow the loan from a credit union in your locality or one you’re a member of.
Also, there are consumer finance companies and peer-to-peer lenders giving loans to qualifying borrowers. There have recently been too many internet lenders you can access via your smartphone. The fantastic thing about internet lenders is that they are quick and have few restrictions.
When borrowing through an internet lender, you must know that your borrowing limit grows as you continue borrowing and repaying their loans on time.
However, you must be careful with the internet lenders as not all of them are legit. Some lenders may promise loans with little interest only to rip you off in the name of processing fees.
Thankfully, you can confirm if a lender is legit through platforms such as the Better Business Bureau or Consumer Financial Protection Bureau.
4. When to take the loan
As stated earlier, personal loans are easy to access and fast process.
The quick process can see you tempted to request a loan whenever any financial challenge arises. You must know that not all economic problems require this kind of assistance.
Some circumstances require other options for financial help. According to business experts, personal loans are usually suitable for short-time financial emergencies.
Some emergencies that may require a personal loan include a medical emergency.
As you’re aware, life is unpredictable, as you can never tell when you or your loved one needs some medical care. You may even have an insurance cover or funds set aside for such instances.
However, the medical situation may be urgent, and processing those funds may delay the treatment.
Also, the money in your savings account may not be enough to pay for the emergency, and that’s where a personal loan comes through.
Emergencies such as unexpected deaths may require a personal loan, as well.
Remember, such an instance comes when least expected and can leave you with hefty funeral expenses, which must be covered within a limited time frame. In such a situation, you can go ahead and sign up for this type of loan and repay it when everything is back to normal.
You can also ask for a loan to repair your car or truck, especially if it’s what you use to run your business. Also, some people take this specific loan to pay for their education expenses. Well, a personal loan is a perfect option for such an undertaking as education is categorized as an investment.
However, taking a loan to pay your fees is not advisable, as this may cost you more money when it comes to interests.
The loan can also be used to pay off your monthly credit card debts. It’s a good option, especially during those months when unexpected expenses interfere with your finances.
When it comes to a personal loan, you should desist from requesting the loan to pay for instances such as a wedding, honeymoon, vacations, or buying a car.
Borrowing for such cases may seem necessary, but I can see you stuck into paying the debt years after the moment has passed. It’s advisable to save for such activities instead of scaling your budget to a figure you can manage without needing to borrow.
5. Impacts on your credit score
Once you request a loan, the lending institution pulls your credit score as part of the application process. Typically, the pulling of your credit score is termed a hard inquiry.
A hard inquiry lowers your credit score by at least a few points. Surprisingly, hard inquiries do remain on your credit history for about two years. For this reason, you’re always advised to go to a lending institution that you’re a member of.
Generally, an institution that has your credit history makes a soft inquiry. The good thing about a soft inquiry is that it doesn’t impact your scores.
6. Rates/fees applied
Interest rates and costs charged when processing a loan are one of the most important things to consider when shopping for a lender.
They can make a big difference regarding the final amount you’re likely to pay over the life of the loan issued. Every lending institution has different rates and fees meant to woe clients into borrowing.
Therefore, you must ensure that you consider the various institutions in place to pick one that has suitable rates and costs on the list. Here are some of those fees and rates you’re likely to encounter when asking for a personal loan.
As stated earlier, the interest rates vary from one lending institution to another and range from 5-36 percent. The percentage is based on factors such as the amount of loan borrowed and the repayment period.
With that said, the longer the time you’re given to repay the loan, the higher the interest rates. Therefore, you must take your time to consider interest rates.
This fee is usually the amount of cash a lender may charge you to cover the cost of processing a loan. This charge also varies from one institution to another and is dependent on the amount of personal loan you are asking for.
Therefore, it’s advisable to go to an institution that doesn’t charge any processing fees or one with a fair deal on the list.
In case you fail to pay your loan on time, you’re likely to incur some penalties based on the type of loan taken. The funny thing is that some lenders also charge a fee if you pay your loan before the agreed period.
Such institutions would operate on a theory that they will be missing out on some interest they would have earned if you repaid the loan per the agreement. It’s advisable to avoid lenders with such an arrangement since such plans can see you part with some money for only paying what the lender owes you early.
When shopping for a personal loan, you must add all the costs associated with the credit. Combining all the expenses helps you pick a lender offering the fairest deal among all the others in consideration.
Besides, this tactic prepares you for what to expect with your loan. It’s advisable to ask your lender to give you a breakdown of everything you’ll pay back at the end of the payment period. The analysis helps you point out all the hidden charges, reducing future surprises.
7. A personal loan is a short-term solution
Time taken to process a personal loan is almost similar to that of a line of credit. Say, for example, you can have your loan within 24 hours after the application. The only thing required to process these two loans is your credit profile, and you’re set to go.
Funny enough, you need a single application for a line of credit, and your loan will be available when you need it the most.
Personal loans, they must be paid within a short period as opposed to a mortgage, where the repayment period can take even decades.
When it comes to personal loans, the maximum number of years you can choose to repay the loan is seven years.
Seven years is a reasonable timeline, as it’s advisable to resist borrowing a loan for a longer time than what is needed. Therefore, you should avoid borrowing a personal loan for projects such as a home remodel.
Such activities may ask for a lot of money, which may be too hard to repay within a limited time.
8. Risks involved
Compared to credit card debts, which can be paid off within an undetermined amount of time, a personal loan must be paid within a given period. Hence, you will be forced to repay the loan faster to avoid the consequences.
For example, your lender can file a case against you in a court of law for failing to honor the loan agreement. Such instances can see you fined by the court, not forgetting that you will still repay the loan.
Besides, by borrowing a personal loan, you stand the risk of being listed with the Credit Reference Bureau (CRB).
Most lenders request info about a borrower from the CRB before proceeding to process a loan. Therefore, being listed with the bureau as a defaulter will mean losing chances to get a loan.
The process of borrowing a personal loan can be complicated, based on the fact that there are a lot of things to consider.
That should not be the situation because this kind of loan is easy to access and the process.
This article explains eight things you must have at your fingertips before you go ahead and sign up for the loan. Read through each of the tips to understand what it’s like to borrow and repay a personal loan.