What is a Personal Loan?
A Personal loan offers the easiest and fastest way of raising cash for current financial needs. Unlike other types of loans, one does not need excellent credit ratings, six figure income or collateral to apply for a personal loan. These set of loans come with high interest rates compared to collateralized loans as they are offered based on reputation.
Personal loans are mostly used to meet basic expenses relating to vacation costs, household extensions, and repairs. They can also be used to consolidate debts such as credit cards or cater for one-time expenses such medical bills funeral and wedding costs.
These loans usually come with two-to-five year’s term limits with an interest rate of between 8.5% and $18.5%, depending on credit rating. While most come with fixed interest rates there are exceptions that come with fluctuating interest rates.
They are also different from cash advances, payday loans, title loans and credit cards that come with fixed payment terms.
Personal Loan Eligibility
These set of unsecured loans are offered based on credit history, which shows one’s ability to make payments from personal income. Repayments are usually made through fixed amount installments. Loan amounts in this case range from as little as $1000 to as much $100,000 depending on a lender.
Borrowers with good credit scores always stand a higher chance of securing personal loans. However, this does not mean that lenders always turn down applications with lower credit scores. Lower credit scores will most of the time limit the amount of money one can access.
Strong credit scores boost one chance of getting a personal loan at a much lower interest rates compared to when one has lower scores. A higher interest rate could lead to large monthly payments which can become unaffordable leading to missed payments.
Credit Score Range For Getting Personal Loan
A good credits score for personal loans is one that ranges between 725 and 759. A score of between 760 and 859 is considered excellent and would most of the time command lower interest rates.
Along with credit scores, lenders also look at debt to income ratio to ascertain one’s ability to make repayments. This ratio is crucial in that it measures one’s ability to manage a debt based on monthly income.
Another important thing that lenders look at is applicant’s source of income. A reliable source of income will most of the time lead to a successful application. Lenders also look at monthly debt payments that should be at least, below 43%, in addition to other financial obligations such as bills alimony or child support.
Data points on college grade point or career may also be used to ascertain one’s ability to handle a personal loan. The idea behind this background check is that some careers or jobs are stable than others thus placing one in a position to repay their loans on time. Other factors considered include how one plans to use the funds, social media presence or how one contacted the lender.
Where Can I Get a Personal Loan
Personal Loan from Banks & Credit Unions
Local community banks and credit unions are some of the best financial institutions for personal loans. Credit Unions are especially the best as they offer lower interest rates as most of them are not in the business of making profits.
Personal Loan from Online Lenders
Online lenders such as Prospects and Lending Club also offer generous amounts of personal loans and competitive rates. Their rates are usually lower than those offered by banks. Pawn shops also offer personal loans in exchange of valuable items such as jewelry electronics or artwork. The merchandise in this case acts as a collateral.
Carrying out a background check on a lenders terms of offering is essential if one is to be on the know, of any hidden costs that may come into play especially with low-interest personal loans. Many lenders who offer personal loans at low-interest rates charge significant fees that show up in the overall amount folded in monthly payments.
Read the Fine Print
Understanding the terms of a personal loan and demanding answers on unclear matters is essential if one is to avoid future disagreements with a lender. One of the things to look out for include prepayment penalties, which some lenders charge in instances where one pays off the full loan amount early.
Some lenders automatically charge payments from checking accounts. In this case, one should consider setting up a low balance alert to avoid overdraft fees from a bank, if the inevitable happens. The total cost of a loan should be clear from the start and figured out into an annual percentage rate.
Personal Loans Risks
Personal loans are usually paid over a specific period. Failure to do so could result in lawsuits as there are no collaterals involved for a lender to use to recoup his investments. There are also scammers who use false advertising to lure people into false agreements such as having to pay an ‘advance fee’ for loan processing.