What You Need to Know About Personal Loans

What You Need to Know About Personal Loans

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Sometimes you need to borrow money without a reason. Or at least a reason that your banker won’t care about.

Personal loans can be used for most any reason and are usually requested by consumers for a variety of purposes including funding a vacation, paying for a medical procedure or buying something for the home. The “personal” aspect of these loans mean that you can personalize how you will spend the money.

Most lenders offer personal loans. The following covers everything that you need to know about them.

Secured or Unsecured

Personal loans are available in two ways: secured and unsecured. A secured personal loan is backed by collateral, such as a bank account or an asset. An unsecured loan has no such backing.

Interest rates for a secured loan are lower than an unsecured loan. The reason is that the risk is lower when an asset is present to back up the loan. With a secured loan your collateral is placed under lien and that lien is lifted once your loan has been paid off. On the other hand if you default on the loan, then that asset is seized for payment.

Your Credit Picture

Like any loan, personal loan approval is based on certain financial factors including your credit rating and your income. Your bank or credit union has certain loan parameters that must be met.

Having good credit is important, with some lenders requiring borrowers to have excellent credit or a score of 700 or above. The higher your score, the more likely you will be approved for a loan and one with favorable terms including a lower interest rate.

To obtain a personal loan, you usually must be employed. Or, if you have sufficient income through a pension, Social Security or other regular payment, you may qualify for a loan. Your lender is interested in your ability to repay this loan and will look at your income as well as your current debt.

Loan Terms

Generally, personal loans are offered with a minimum amount borrowed. Some banks may offer loans for as little as $500 while other banks may require loans starting at $3,000 or more. Borrow only as much as you need and make sure that you understand the loan terms before signing your agreement.

Personal loans can usually be decided within one business day, sometimes within hours. If you have an existing account with your bank or credit union, those monies will usually be deposited in your checking or savings account the next business day. Typically, no credit application fee is charged and you’ll be offered a fixed term loan at a fixed interest rate.

Loan Considerations

Shop around for a personal loan to obtain the best possible loan terms. Your bank or credit union is the logical first place to shop, but compare your lender’s terms with at least three other lenders. Understand your options and choose the personal loan that is right for you.

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Categories: Consumer Financing, Loans

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