What is a Personal Loan and Why You Need One?
An amount of money loaned to a person without a collateral is called a personal loan. Although, there are a few lenders in the market who ask for a collateral depending on the loaner’s credit score. In the earlier times, personal loans were considered as a financial solution for people in desperate financial needs. However, today the terms and options available for personal loans are comparatively better than earlier, thus encouraging more and more people to take personal loans for their varied needs.
A personal loan is a great finance option especially if you have a decent credit score and an outstanding credit debt. You can use a personal loan for paying your credit card and also improve your credit score by making timely instalment payments of your personal loan.
If you don’t have any credit debt, taking a personal loan and repaying it timely can help you establish a positive credit. This in turn, will help you in the future when you ask for a car or house loan.
On the other hand, if you have several outstanding debts or just one debt with a high rate of interest that is cutting off a large amount of your monthly paycheck, a personal loan can really help you pay off the debt and save money every month. All you need to do is simply find a lender who offers you money at a lower rate of interest, thus helping you pay off your other debt.
With a personal loan, you can pay for home renovations and thus increase the value of your home. So, in the future when you plan to sell off your house, you get a better deal for your home. Increasing the value of your home will also help you to borrow money against the home’s equity.
But life is unpredictable and you need to know that things don’t go according to your plan always. Having a little extra help at times always feels good. A personal loan is a great help for paying unexpected medical bills, sudden expenses such as a funeral and home repairs caused due to disasters such as flood or fire. So, when life brings you hard times, extra financial help such as personal loans can give you great peace of mind by making things easier for you.
Things you Must Know Before Applying for a Personal Loan
1. Your Credit Score
What is your credit score? Before you apply for a personal loan, make sure you check your credit score. Your credit score can be calculated as per your previous loan repayment history, other financials markers and your credit card usage. This gives your lenders some idea about how you use your money or how responsible you are with your payments or whether you are default risk for the lenders. There are some lenders who don’t use credit scores for qualifying you for a loan, but they still prefer to keep a track of your credit score.
Better your credit score, more likely it is that you receive your loan easily. Also, with your high credit score, you are considered as a low risk. This also means that they will offer you the personal loan at a lower rate of interest.
Another thing to remember is that a no debt history is also not a good thing. Almost all leading loan offering companies want to see that you have taken loans in the past and you have successfully made your payments in time, and that you can be trusted.
2. What to do if you have a bad credit score
The market has many lenders who provide loans to loaners even if they have a bad credit. Although, you will have to pay a higher rate of interest with less loan flexibility and loan repayment terms.
Usually, a credit score lower than 630 is considered as a bad credit score and people who get loans with such credit score, they have an average APR of 28.5% to 32.0%. However, if you have a collateral to put against the loan, you can secure the loan despite of your low score.
Some lenders also allow co-signed loans. In these loans, a person with better credit score co-signs the loan with the loaner. Although you get a loan through this method, the person who co-signs with you gets on the hook. If the lender fails to make a payment against the loan, it would directly have a bad effect on their credit as well as yours.
3. How interest rates work?
The amount a lender charges as an interest for the loan to the borrower is called the interest rate. It is usually mentioned in percentage of the borrowed amount. So, if you’re combining your debt and it still has a lower interest rate, it simply means that you are doing good. If the interest rate is high, you need to think of a way to make the loan a better option for you.
While taking a loan, your interest rate is one of the most important things to consider. It increases a significant amount to your overall repayment amount. Even 1 percent interest rate lower or higher can make a huge difference to your repayment terms. Another factor to consider is the APR, which includes both Charges and Fees.
4. Factors that affect the interest rates
Length of repayment: Always remember that the longer your repayment term, more is the interest you pay to the lender for the loan. If you can pay a higher monthly amount for a shorter time period, you will save more money on the interest. Hence, it is important that you check your monthly budget first and only then determine the loan amount and the monthly repayment amount. This will simply ensure that you don’t get into more debt than you already are while paying for the new loan.
Credit Score: Better your credit score, lower the interest rate. There are a few lenders in the market who don’t consider checking your credit score while offering you a loan. Such lenders will simply check your past history for offending loan details, bankruptcy, foreclosures or other red signals that could make you a highly risky borrower before they consider the rate of interest for you. In such a condition, your income (or the lack of it) will be the central factor for determining your loan’s interest rate.
Fixed vs variable rate loan: A variable rate loan has a fluctuating interest rate as per the changes in the market and usually has a lower rate of interest than that of a fixed loan. On the other hand, the rate of interest for a fixed rate loan is higher and stays the same throughout the loan term.
5. What is APR?
Annual Percentage Rate (APR) tells you about the total amount for your loan that you will pay per year. It includes fees, payment and the charges to help you know your annual loan repayment amount. Lower the APR, less you will pay in the long term.
Your APR depends on your personal loan and your lender. Generally, it will be lower than what you receive from a short term loan or payday. It starts at 3% and has a capping limit at 35.99%. So, if you require a loan, a personal loan is a feasible option for you.
6. What is the amount you can get approved?
This is a very tactical question, and there is no right or wrong answer for it. Generally, the approval depends largely on your necessity, your earnings and ability to pay the loan back. So, if you are trying to merge your debts, your loan amount should be bigger than the outstanding loans amount. And, if you want to cover medical bills or expenses for a home renovations, it must meet with your needs so that you don’t need to go through the problem of getting another loan.
Also, you need to make sure that your payments are not too large for you to pay throughout the loan term. After all, it makes absolutely no sense in taking a loan that you cannot repay back and thus adding more amount to your debt.
7. Ideal loan term you should choose
This is very simple to decide. You must choose what works perfectly for you. So, if you want to choose a lender that offers you a short term loan, then you will have higher monthly payments at a lower interest rate for your loan term. On the contrary, if you choose a long term loan, your monthly payments will be low, but your interest will be much higher.
Paying higher interest rate is not at all a bad idea, if you can make a fixed monthly payment without disturbing your other expenses.
How To Choose A Lender?
With the market offering a huge variety of lenders, it is important that you choose the right one for you and your financial needs. Here are some tips to help you choose:
Check and compare the top market lenders
Never choose the first lender that comes your way. Try to check the market, see the different offers you get. Invest some time in learning about the different loan offering companies, read their reviews and compare their competitive rates with other competitors. This will help you save some money during your loan repayment term. If you are not happy with the terms offered to you, negotiate with them or simply look for other funding companies. Remember that you are a customer and that the funding companies are looking for clients for business. Choose a lender that offers you terms most suited to you.
Check if the lender is legit
Check the market reputation of the lender. Check for online complaints and do a background check to ensure their legitimacy. Also check if their customer services are good and responsive. Check their experience in the business and what their customers say about them.
Fees and other charges
When you take a loan, the loan amount you ask isn’t the only figure to consider. There are also origination fees, late fees, starting fee and processing fee. Hence, make sure you know the added charges and the fees do not add much burden to your total loan amount.
In order to make sure you choose the best personal loan, determine your needs as a borrower. Also compare the lenders and see which company fulfils your needs best and has a decent interest rate.
Main criteria you should check while comparing the best loan providers
Max loan amount: See the maximum loan limit offered by the loan provider. Some companies offer up to $20,000 whereas a few others offer up to $100,000.
APR: Every lender is different and each of them offer you a different deal. Every lender will offer you a different APR. Hence, it is important that you find the rates that you are confident of keeping up with.
Loan Term: The loan term provided by the companies varies from a few months to years. Hence, it is recommended that you check the loan term for paying off your loan amount carefully with your lender.
Qualifications: A few lenders require you to have a pristine credit score for you getting a loan, but there are others who will give you loans even at a lower credit score, but with a few additional terms. You may need to provide a proof of your employment or your income. So, it is best advised that you check the basic requirements of a lender before you apply the company for a loan.
Speed and Simplicity: One of the main benefits of having online lenders over banks is the fact that they cut off a major part of the paperwork from the loan lending process. This simply means that it is easier for a borrower to get a loan. There are some lenders who can transfer the loan amount in just a few days or even the same working day.
Frequently Asked Questions
Third party lenders are basically non-traditional lenders who can lend you money directly or act as brokers, comparing the lending market and companies for you, thus offering you a variety of loans at different rates. They help match your needs with a suitable source, thus making sure that you get a good deal.
Moreover, third party lenders not always work with personal loans. They also offer help with student loan debts, mortgages, credit cards or consolidating different debts into a single debt.
Although banks and third-party lenders both have a lot of similarities such as performing a credit check, checking your loan repayment abilities, asking you questions about where you work or how you will make your payments, etc. before offering you a loan. But still, here are a few reasons why third-party lenders are better than banks:
• Faster: You don’t need to make an appointment for applying a loan online. You can apply online in minutes and get approval in just 24 hours. If your loan get approved, there are some lenders who can transfer the money into your account within 1 business day or maximum between 1 and 7 business days.
On the other hand, banks follow a stricter reviewing procedure before lending money to a borrower. They check your past financial transactions and hence take time approving the loan. This process takes more time and hence, they fail to compete with the third-party lenders.
• Can help you with bad credit: Banks usually turn down borrowers if they have a bad credit rating. However, a third party lender can help you get a good lender despite your credit score in a shorter time duration. There are several lender comparing websites who can quickly help you find a suitable lender that meets your needs.
• Can help you lower your interest rates: Being online directly helps you get a greater access to more number of lenders. This means you get a better choice to choose from. A good competitive market ensures low interest rates to the borrowers. Although, it doesn’t always guarantee you a lower rate than the banks. However, it is never wrong to search and check the market.
There is a big misconception with people that getting a loan from a third-party lender is easy money. Yes, getting the loan approved is easier and quicker than banks but taking a loan is as such a big decision that always has its owns associated risk. Here are a few risks that you must consider before taking a third-party loan.
Origination fees: Also known as upfront fees that is charged initially by the lender, this fee covers all the admin cost for setting up your loan and a part of the lender’s personal income.
The origination fee amount usually varies between different providers. There are some lenders who may charge you between 0.5% – 1% of the total loan amount. However, there are other lenders who can charge you higher than this amount. Thus, it is important that you scan the market and find good lenders that don’t charge high origination fees. A good and reputed lender will always make sure to discuss these charges with you before you take the loan.
Interest rate: This is another variable that you need to consider. You need to understand that 2 people who apply for a loan amount of the same value to the same company can get the loan at different rates. The main reason being your circumstances. Higher the risk of repayment, higher the interest rate you will end up paying.
Thus, make sure to ask the total amount that you will end up paying during the loan term to the lender. This will give you a clear idea of the interest rate you will pay the lender. If the rate is higher, try and check other lenders in the market.
Early loan Repayment penalties: Lenders have a fixed loan term for borrowers. Thus, longer you take the time to pay your loan, more the interest your lender will earn from you. So, if you are repaying your loan earlier than expected, you may have to pay an early repayment penalty to the lender. Hence, it is important that you clear this penalty with your lender before applying for a loan.
Payday loan risks: Third party lenders usually loan you an amount on your promise of paying a fixed percentage of your next salary. So, if your interest rate is high and you fail to make your timely payment, you may get entrapped in a deeper debt. Hence, you need to be absolutely sure that you can make the repayments in time for the new loan you take.
Personal loans come in two types, secured and unsecured personal loans. Let’s understand them here:
Secured Loans: In a secured loan, you put an asset against your loan as a security, if you aren’t able to repay the loan. You can keep your car, house or any valued asset as a security against the loan.
This is a low risk loan for the lender, as they are sure that the borrower will repay the loan either way. Also, secured loans come with a lower interest rate than unsecured loans.
Secured loans are also considered great for people who have a low credit score. They are also ideal for people who wish to build their credit.
You may discuss about secured loans with your lender and have a better understanding for it. However, there is always the risk of losing your asset if you fail to repay the loan.
Unsecured loans: In an unsecured loan, the loan amount is not secured with any of your valued assets. Which means that if you fail to make your payments, the lender can’t take away your assets as they were not a collateral. Although, these unsecured loans are considered a high risk for the lender, they are offered to the borrowers at a comparatively high interest rate. As a result, you will be paying more to the lenders during the loan term. Also, if you miss a payment, it will have a big impact on your credit score, thus making it difficult for you to apply for more loans in the future.
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