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A personal loan is cash lent to you with interest. You have to pay the cash and the interest back within a timeframe you and the lender agree on.
Unlike a mortgage or car loan, personal loans don’t need to be used for a specific purpose. They’re good for almost anything.
How do they work?
Most personal loans are unsecured, meaning they do not require collateral. Collateral is a valuable asset the lender can take from you if you don’t pay back the loan.
Most lenders look at your credit score to see how risky it is to lend you money.
The interest you pay is called an annual percentage rate (APR). The APR is usually closely tied to your credit score.
If you’re approved for a personal loan, you’ll receive a lump sum of cash, but you’ll have to pay it back in monthly installments until the loan term expires.
Should I get a loan?
This is the first question to ask yourself. Take a moment to think about it.
Remember, you’ll always owe interest, so you’re always paying more than what you’re getting. If you don’t need to take out a loan, don’t.
Who are they for?
If you need to consolidate debt or make a large purchase for something like essential home repairs, then a personal loan may be a good choice.
If you have good credit, personal loans often have better interest rates than credit cards.
How do I get a loan?
Once you’ve decided to get a personal loan, figure out how much to borrow. Don’t borrow more than you need to.
Next, check your credit score.
Get an updated credit score from one of the three main credit reporting agencies: Equifax, Experian, and TransUnion.
Sometimes checking your credit score can hurt it. Getting your credit score at one of these agencies won’t affect your credit score.
Once you have and understand your credit score, look into your loan options. There are two main types of lenders: banks or credit unions and non-banking financial institutions (NBFIs).
NBFIs can be finance companies, peer-to-peer lenders, and payday lenders.
We don’t recommend borrowing from NBFIs. They usually charge high interest rates to borrowers with poor credit who don’t have other lending options.
Once you’ve figured out who to borrow from, it’s time to apply. This can usually be done over the phone or in-person.
You can apply for multiple loans at the same time to see which one has the lowest rate. If you go this route, send all the loan applications as close together as you can.
Loan applications are hard inquiries that do affect your credit score. If they all come at once, they have a smaller impact on your credit score.
If you get approved for a loan, read the fine print.
Check the APR and any other fees and penalties. You should have a full understanding of the terms before agreeing to them.
What’s a good loan rate?
The average APRs for personal loans in the U.S range from 10 percent to 28 percent.
The better your credit score the lower your APR will be.
The loan with the lowest APR will be the cheapest to pay back, but check for hidden fees before signing up.
Always compare your options.
Is this a good time to take out a loan?
If you can’t repay a personal loan, your credit will be impacted for a long time. Take your payments seriously.
Make sure you need the loan and that you can pay it back.
Wants are not good reasons to take out a personal loan.
If you’re looking at a loan to cover medical expenses, check with the hospital first to see if their billing department will work with you on a payment plan.
Personal loans aren’t for everyone.
If you need credit now, there are other options. Each of them charge interest, but they’re worth thinking about.
Here are a few alternatives to personal loans:
- Credit cards
- Peer-to-peer lending
- Personal line of credit
- Paycheck advance
- Home equity loan
Personal loans can be complicated, and finding one with a good APR takes time.
Before taking out a personal loan, make sure that you will have the ability to make the monthly payments on time.
If you read the terms and can pay it back, you’re in a good spot.
Opinions, advice, services, or other information or content expressed or contributed here by customers, users, or others, are those of the respective author(s) or contributor(s) and do not necessarily state or reflect those of The Bancorp Bank (“Bank”). Bank is not responsible for the accuracy of any content provided by author(s) or contributor(s).