CHOOSING THE BEST PERSONAL LOAN
What is a Personal Loan?
Personal loans or customer loans are monetary assets that are granted to individuals usually unsecured or through a guarantor. The loan, however, can be secured through assets purchased by the individual. Personal loans can be granted for medical reasons, family needs such as vacations or household maintenance, and are not granted for business or commercial use. The process of getting a consumer loan is usually relatively simple and straightforward as it involves acquiring a lump sum of cash from an online lender or bank and subsequently paying back the loan in fixed installments over a given period. Interest is also paid on top as with any other type of loan.
Should I get a Personal Loan?
Consumer loans are considered a versatile asset in terms of being helpful in case of an emergency requirement of funds. If used correctly, they can help to break out from credit card debt when having issues maintaining minimum payments. Before acquiring a personal loan, it is crucial to consider whether one can afford to pay back the loan or whether the personal loan can be used to better the current situation you are in.
Personal loans can affect one’s credit score when the monthly payback installments are not met, resulting in challenges faced when applying for other loans in the foreseeable future. It is advisable for anyone seeking to take a personal loan to make a budget and ensure they can pay off the installments each month.
Things to know before applying for a Personal Loan
When opting to apply for a personal loan, it is crucial to know what your credit score is to determine whether you qualify. Any lender will check ones credit score to determine if your application will be successful. A good rapport with a bank can get you a favorable deal, especially with regards to honoring past loans, bills, and accounts. For borrowers with average or fair credit scores, credit unions are known to offer lower interest loans but require opening up a savings account before qualifying for a loan.
Interest rates for personal loans vary according to different factors such as loan amount, credit score, and the loan term given to pay back the loan. Interest rates can vary from 3.49% in the best-case scenario and go up to +30% on the higher side. The cheapest and lowest rates are awarded to individuals with excellent credit scores and additionally, a short repayment term as possible.
For each need, going for short term personal loans can mean paying less interest but with higher monthly installments. With long-term personal loans, the interest is generally higher but the monthly payments are lower. As a general rule, a borrower is required to spend no more than 35% to 43% on debt, in a case where one’s monthly income is $4000. It is ideal for maintaining a total debt obligation of less than $1720 every month. It is considered wrong to stretch your finances too thin with a high debt-to-income ratio which leads to cash flow troubles. Taking such risks of a higher debt-to-income ratio can be possible if there is a presence of a safety net to fall back to such as savings.
An origination fee is subtracted as an administration and processing cost charged between 1% and 5% or as a flat-rate-fee. The fee is usually a one-time upfront charge, however some lenders charge no fees so be sure to keep an eye out for this.
Types of Personal Loans
These loans have monthly installments that stay the same for the duration of the loan. They are easier to budget for and are preferred when making consistent payments each month.
A benchmark rate is set by the lender, and loans are tied depending on how the rate fluctuates. This can change the interest on the loan as well as the monthly payments to be made. Variable-rate loans carry a smaller APR over Fixed-rate and contain a cap on how much the rate can alter over a specific period.
These are individual loans that aren’t backed by any collateral such as car or properties and considered risky by lenders. They incur higher annual percentage rates and are based mainly on credit scores. Their interest rates vary from 5% to 36% and are paid within 1 to 7 years.
These are backed by collateral and can lead to seizure of personal property if loans have defaulted. It incurs fewer rates as compared to unsecured loans as they are less risky for lenders.
This is used to roll multiple debts into a single new loan and carries a less APR than existing debts, thus saves on interest. It is usually taken to simplify debt payment.
This is a loan for borrowers with little to no credit histories making it hard for the individual to get a loan on their own. A co-signer guarantees to repay the loan if the individual fails to do so.
Choosing a Lender
Personal loan lenders may include direct lenders, peer-to-peer lenders, banks, and online marketplaces. Each of these has its own merits. however, it is essential to consider the following before choosing any of these lenders:
- Check the lender’s reputation through reviews and the number of years in business.
- Compare different lenders and find one that fits in terms of their competitive rates
- Consider charges offered by different lenders such as maximum loan amounts, APRs, or loan terms.