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Personal Loan FAQ
If you are looking into getting a personal loan, sometimes called a personal line of credit, this information may save you time and money. If you need some quick capital for whatever reason, and you are not sure how easily you can get a personal loan and the fees and interest you may be paying, read on and find out.
A personal loan, like any loan, is a contract to borrow money entered into between the borrower (you) and the lending institution lending you the money. The loan contract will state the term of the loan agreed upon and always is signed in advance. The loan contract will also specify specifically the payment schedule and assigned interest rate or APR.
Video: Personal Loans
Personal loans are typically almost exclusively unsecured loans, meaning you will not have to use a home or other personal property as collateral. Personal loans are offered from banks, and other smaller financial institutions, such as credit unions or direct loan outlets.
With the advent of the internet, many lenders are taking the application process completely digital. It is now possible to go online, securely provide your personal information, and get an online loan approval guaranteed within minutes. Gone are the days of going to multiple banks and filling out multiple applications, just the click of a mouse is all it takes to find out these days.
What Determines Personal Loan Qualification
Personal loans, as they are unsecured with no guarantee of repayment, are wholly based on your credit profile and income level. The lender does not, for obvious reasons, see you default on payments. For this reason your credit number and report will be scrutinized and income verified to make sure you are able to keep to the terms of your loan. While bad credit is certainly not going to increase your chances of finding a personal loan, it won’t help. Banks and even more so credit unions are willing to work with borrowers looking to get a personal loan, even if they have poor credit. The down side for the borrower is these loans, as they are higher risk in the eyes of the lender, will come with much higher interest rates than an equal loan to a person with excellent credit. As most people fall somewhere in the middle, there are still plenty of borrowing opportunities to be had. Don’t stop yourself from looking for a personal loan because you have some credit problems or had some in the past. There is more than likely a loan and lender that will work with you.
Personal Loans and Interest Rates
Personal loans will always have higher interest rates attributed to them than mortgage or other secured loans, plain and simple. The reason is those loans come with a guarantee of sorts of payment, or the confiscation of your personal property used to secure the loan as collateral. Without that extra security, banks and credit unions are taking a risk lending the money, and will have a percentage of loans “bottom out” or go into default. These losses are covered by increased interest rates across the board to borrowers. Your credit rating, amount borrowed, length of loan term, and income will all be determining factors in the interest rates offered to you. These are ballpark figures of what you should expect to find for interest rates on personal loans based on your credit rating group:
Excellent Credit- More than 700 points: 10% or less
Good Credit: Between 600-700: 10-14%
Average Credit: Between 500-600: 14-18%
Poor Credit: 500 and Below: 18-29%
The Positives and Negatives to Personal Loans
While there are many benefits to having a personal loan, there are also cautionary warnings and even some drawbacks to be understood.
Video: Is Loan Consolidation a Good Idea?
Potential Drawbacks:
Increased interest rates on loans, meaning you will pay more for your borrowed money over the life of the loan
Potential to use personal loans as an “ATM card” to fix seemingly temporary financial problems, increasing your debt and potential to fall victim to too much of it
Applying for online personal loans multiple times will damage your credit score. Every application will generate a new and unique inquiry into your credit history which if there are several, will cumulatively lower your credit score.
Benefits to Personal Loans:
Personal loans provide freedom for your spending and existing debt needs. Unlike a car or home loan, a personal loan will not dictate how you spend the money leaving you the freedom to spend your money where and when you need it.
A quick and easy solution to your cash flow problems. You can apply today and have money in a very short time to get you out of any financial fix you are currently in, help you start a new business, whatever you choose to do. The loan will let you pay back the money in small increments over time, freeing up your cash flow.
Lenders Willing to Loan to Those with No Existing or Bad Credit
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