Personal Loans 101: What Is A Personal Loan
Nowadays, loans have been a part of everyone’s day-to-day living. People would agree to the fact that if not most, everyone in this world has their own set of loans and debts. Regardless if you’re young or old, rich or poor, you would probably be one of those people who consider loans as an ideal way to fight financial struggles. Whatever reasons you might have to have a personal loan yourself, it’s essential that you know the different kinds of loans and what are their implications for your overall credit performance.
But First, What Is A Personal Loan?
One of the most common loans which people acquire for is a personal loan. If you don’t have any experience in applying for this loan, such term might seem alien to you but personal loan is granted to you for your personal use. You have the option to use this loan for whatever purpose you might have. With the struggle for financial stability, majority of the people tend to use this credit almost every day. Yes, this can be considered as the easiest way out for your financial woes but if you don’t know how to properly manage this credit, you might be in trouble.
So How Does A Personal Loan Differ From Other Loans?
There are many differences between a personal loan and other types of loan. Some of these differences are:
- They differ from purpose, character and even overall impact on your credit performance and score. This is why when you choose to acquire a personal loan, you need to make sure that you’ll always stay on the right track because if not, this credit will cause you stress and worst, loan defaults.
- A personal loan is also an “unsecured” loans, which means that you can get this loan type without using and risking your assets. It gives risk on the side of the lender since he/she has no guarantee that you’ll be paying on time. Lenders will just trust your words or the promise you gave that you’ll pay it until you pay your entire loan balance. As a result, personal loan has usually higher interest rate.
- This kind of loan gives a fixed interest rate and a specific payment term which usually ranges from one to five years depending on what you have agreed. Its amount varies also, but most of the time, ou can have a personal loan for minimum of $1000 and a maximum of $50000.
How Will You Qualify For A Personal Loan?
If you’re interested in applying for a personal loan, the first step is to know the qualifications to avoid any frustrations throughout the entire process. You also should be prepared so you can guarantee that you’ll be granted that loan the moment you need it. The following are some of the things you should be aware of for you to qualify for a personal loan:
- A personal loan will require you to have a good credit score and history. The lender will solely depend on this information since this loan doesn’t require any collateral whatsoever.
- When the lender accepts your application, they will verify your income and debt. This will allow them to foresee if you have enough income to settle your monthly payments on time. How well you pay your debts in the past will also influence whether the lender will approve your loan application or not. The process will not end there, but they will go down to your credit history, reports and score.
- After verifying, the lenders will give you a credit grade. Your credit grades will also be one of the determinants as to the amount you can borrow, your term of payment and when you can get your borrowed money.
This might seem tedious and complicated but you should be prepared to ensure that your personal loan application will go as smoothly as possible.
What Are The Typical Formal Purposes Of A Personal Loan?
By all means, you can use your personal loan however you want it. However, your purpose might not be enough for the lender to believe that you really need this loan. For you to avoid rejection, it’s best to use your personal loan for more formal purposes and some are listed below:
- Debt consolidation: You can use this idea but please be reminded that this reason requires a more significant responsibility because it has a big implication in your credit line.
- Educational expenses: This is a good reason and a good purpose as well. If you use this purpose, it should be true. Remember that the lender will monitor and it will sought you after your graduation.
- Pay off credits: Applying for a personal loan to pay your existing credits is a common reason. There are times that you need the help of a personal loan to solve your other urgent credit obligations.
- School books: This reason has a strong relation with educational expenses but the latter is more generalized. Find Best Private Student Loan Lenders of 2018 if you need more assistance.
- Vacation: Planning for vacation this Christmas but you don’t have enough allowance? You may try personal loan but you just have to make sure that you can pay it well.
- Wedding: If you want a grand wedding but don’t have the sufficient savings with you, you can use your personal loan to finance your wedding.
Pros And Cons Of A Personal Loan
Just like anything else in the world, everything has its own set of pros and cons and this includes personal loans. If you’re seeing yourself acquiring this kind of loan in the near future or immediately, you should know what to expect.
- Can be accessed easily
- Has lower rate than debts acquired through credit cards
- Has no collateral
- Has usually fixed interest rate
- Repayment will base on your capacity to pay
- Hidden fees and default charges are commonly high compared to other loan types
- You need a substantial proof of documents before you will be accepted
- Has higher interest rates compared to other “secured” loans
A personal loan can be a good choice which you can choose especially when you really need money. However, upon acquiring a personal loan, you should also make sure that you can meet your obligation as a borrower because if not, your credit score will be affected drastically. This impact can influence your future credits and loan applications in the future. Remember that when going through the process of applying a personal loan (or any loan), you should be disciplined – you should be disciplined to prepare what is required from you and disciplined to pay the amount expected from you. You don’t want this loan to haunt you for the rest of your life, right?