What is a personal loan? An informed borrower’s guide
Share via
People take out loans for all kinds of reasons, from emergency bills to home renovations. However, there are different types of loans depending on your needs and finances. Personal loans are a type of installment loan, where you repay in increments over time.
Key features of personal loans
Flexibility and security
Borrowed from a private or institutional lender, personal loans are known for their versatility, allowing borrowers to address a myriad of financial needs, from debt consolidation to unexpected expenses. Unlike secured debt, most personal loans don’t require putting up your assets as collateral. This means you’re not at risk of losing money, your home, or other common collateral assets if you fail to repay the loan.
Predictable repayment schedule
One of the hallmark benefits of personal loans is they usually (though not always) have fixed interest rates. This means your payment amount remains constant throughout the loan term, making it easier to manage your budget.
Be a financially smart family!
Varied loan amounts and terms
Lenders offer a wide spectrum of loan amounts, ranging from as little as $600 to up to $200,000, with terms extending from one to several years. This flexibility helps personal loans cater to different financial situations and goals.
Qualifying for a personal loan
To qualify, lenders usually measure your creditworthiness through a comprehensive check of your credit score, history, income, and other debts. A higher credit score can significantly lower your interest rate, rendering the loan more affordable.
The pros and cons
Pros
Flexibility: Personal loans can be used for a broad range of purposes.
No collateral required: Most borrowers don't need to secure the loan with property or other assets.
Fixed rates: The interest rate and monthly payments are fixed, simplifying budgeting.
Fast funds: Personal loans usually fund faster than other types of loans. You might be able to secure a personal loan within a week in some cases.
More affordable than credit cards? Some personal loan interest rates are more favorable than credit cards. So if you need to make a large purchase, it may cost less over time to repay with a personal loan if the interest rate is better.
Cons
Higher interest rates: Unsecured loans can sometimes mean higher interest rates than secured loans, especially if you have a lower credit score.
Additional fees: Origination fees or prepayment penalties might increase the cost.
Credit check required: Qualifying for a personal loan usually includes a comprehensive credit assessment. Having poor credit may decrease your chances of securing a personal loan.
Credit impact: Missing payments on a personal loan may negatively affect your credit score.
Making an informed decision
When considering a personal loan, it’s critical to evaluate your financial landscape, potential interest rates, and the loan's overall affordability. Personal loans can serve as a powerful financial tool when used judiciously, offering a pathway to achieving your financial objectives while ensuring manageable repayments.
As with any debt or loan, make sure you have a realistic repayment plan you know you can achieve before you borrow.
Personal loan FAQs
Q: How long does it take to get approved for a personal loan?
A: The approval and funding process for a personal loan can vary widely depending on the lender. Generally, it can take anywhere from one to ten business days to get approved and receive the funds. Online lenders tend to offer the fastest turnaround, potentially funding loans within a few days, and in some cases, the same day you're approved. Banks and credit unions might take longer, especially if an in-person visit is required.
Q: What is the interest rate on a personal loan?
A: Interest rates on personal loans fluctuate constantly depending on the market. But in general, they can range from as low as 5% to as high as 36%. The rate you receive depends on various factors, including your credit score, income, and debt-to-income ratio.
Q: Can I get a personal loan with bad credit?
A: Yes, it's possible to get a personal loan with bad credit, though your interest rates may be higher. Lenders may also consider other factors like your income and employment history when making their decision.
Q: Are there any restrictions on how I can use a personal loan?
A: Personal loans are versatile and can be used for a wide range of purposes, including debt consolidation, financing a wedding, or covering unexpected expenses. However, lenders may restrict the use of funds for certain activities. Always check the fine print on all paperwork, contracts, and agreements to ensure you comply.
Q: How does applying for a personal loan affect my credit score?
A: Applying for a personal loan involves a hard credit inquiry, which might cause a small, temporary drop in your credit score. However, managing the loan responsibly by making on-time payments can positively impact your credit score over time. On the flip side, failing to make payments on a personal loan can negatively impact your credit score.
Q: Can I prepay my personal loan without penalties?
A: Whether you can prepay your personal loan without facing penalties depends on your lender's policy. Some lenders do not charge prepayment fees, while others might. It's important to review your loan agreement or consult directly with your lender to understand any potential penalties.
If you’re ever uncertain or have questions, consulting a financial advisor or expert can provide tailored advice suited to your unique financial situation. With careful planning and the right knowledge, navigating the world of personal loans can be a smooth and beneficial journey.
This blog post is provided "as is" and should not be relied upon as a substitute for professional advice. Some content in this post may have been created using artificial intelligence; however, every blog post is reviewed by at least two human editors.
Share via
Hey, $mart parents 👋
Teach money lessons at home with Greenlight’s $mart Parent newsletter. Money tips, insights, and fun family trivia — delivered every month.
