What is a Personal Loan: Everything You Need to Know
The market right now for personal loans is hot and, believe it or not, this trend in borrowing is actually a good thing and reflects the healthy standing of the economy. Consumers are feeling the economic growth and want to take out loans for those big expenses.
So, what is a personal loan, anyway, and what can you expect in the personal loan application process? Read on to learn the answers and more as we cover everything you need to know about personal loans.
What is a Personal Loan and How do they Work?
While there are some lenders who provide secured personal loans, the majority of personal loans are unsecured, meaning they aren’t protected by any type of collateral, such as a car, home, or other property. Instead, lenders—such as banks, credit unions and other third-party loan providers—have other qualifications you should be aware of when applying:
- Credit Score and History. This is a big one and provides the most insight on your financial behavior as well as how likely you are to pay back your loan. While it doesn’t tell lenders everything, it shows them any delinquent accounts you may have, unpaid debts, any foreclosures or previous bankruptcies, late payments, and more details about your credit history.
- Income and Employment History. If you’ve had five jobs in the past year and are applying for a personal loan, this could be seen as a red flag to lenders who care about income stability. You’re also more likely to get approved if you have a higher income.
- Monthly Installments. It’s important for lenders to know what your calculated monthly loan payments will be so they can better determine your budget and ability to pay the loan back.
Let’s Talk Terms
Another factor to consider when applying for a personal loan is the terms and conditions it comes with, which is much simpler than you might think.
Fixed Interest Rate
While it’s not 100% the case, personal loans typically have fixed interest rates, which means the interest rate is set for the life of the loan and won’t ever change. Variable interest rates, on the other hand, will have an interest rate that can change, but these aren’t quite as common since the fluctuation of the rate can make it difficult for borrowers to budget for their monthly payments
Most banks and lenders have a minimum and maximum personal loan amount you can apply for, but with some shopping, you’ll find loan amounts ranging anywhere from $1,000 to $100,000 or more, depending on your credit score, history, and income. Either way, the personal loan amount is established and fixed up front.
How to Apply for a Personal Loan
Now that you’re more familiar with what a personal loan is, let’s look at how you can apply, and what you’ll need.
What to Know Before Applying?
First thing’s first. Before sending in those personal loan applications, you should decide how much money you’ll be needing and calculating your monthly payments, so you know what to expect. You’ll also want to check your credit score to make sure there aren’t any errors or discrepancies that could hurt your chances of getting approved.
If your score is on the low-end, there are plenty of steps you can take to bring it up.
Always give yourself time to shop around and look at multiple lenders to see what fees, interest rates, and payment plans they’re offering. You can get a personal loan from a bank, credit union, or online lender, just be sure to always read the fine print.
What You’ll Need
Let’s break down a list of what documents you’ll be needing when applying for a loan:
- Personal information such as your name, driver’s license number, social security number, birthdate, and contact information.
- Bank account details
- Details on your employer, such as name, address, and how long you’ve been there.
If you’ve ever wondered “what is a personal loan?”, hopefully, this quick guide has helped cover the essentials. Next step is taking a good look at your current financial standing, such as your credit score, and shopping around for the best lender.
Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances. The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.