What can personal loans be used for?
Personal loans are also flexible, meaning you can use them for almost anything you want, even if it isn’t related to paying off debt. Here are some of the most common uses for personal loans:
- To cover medical expenses: Medical expenses can be costly; sometimes, it can take months for your health insurance to cover the cost of treatment. A personal loan can help cover the gap between your insurance payments and the total cost of treatment, so you don’t have to worry about being unable to pay for medical bills that are not covered by your insurance plan.
- To cover home renovations: Home renovations can be expensive but add value to your home when it comes time to sell it. A personal loan can help pay for renovations such as new bathrooms or kitchen upgrades while also increasing your property’s resale value.
- To fix or maintain a vehicle: A car is one of our most important assets, but like anything else, it must be maintained and looked after. You can use a personal loan when you need to fix your car or keep it.
- To take a vacation: Vacations are great for relaxing and enjoying time with friends and family. If you want to go on vacation but don’t have enough money, then a personal loan can help you take time off from work and travel far away from home.
What are the requirements for getting personal loans?
The requirements for getting personal loans are different from one lender to another. However, there are some general requirements that most lenders follow. These include:
- Credit score and history: The lender will verify your credit report, which includes a record of how you’ve handled your credit over the past seven years and how you’ve paid off any debts. A high credit score indicates a good history of handling your debts responsibly. A low score could indicate that you are more likely to default on the loan, which can worry lenders about lending to you.
- Income: The lender will verify your income by requesting pay stubs, tax returns, and bank statements. The lender wants to see that you have enough money to repay the loan with interest.
- Personal documents: To apply for a personal loan, you must submit various documents such as identification cards, bank statements, employment contracts, and other documents related to your financial situation and residence status.
- Collateral: For secured personal loans, you will have to provide some sort of collateral against the loan you are taking. If you fail to pay back the principal amount and interest, your property will be used as security for the loan. The bank or lender can sell your property and recover the outstanding amount from you.
- Origination fee: The origination fee is the amount charged for processing your application and verifying the information you provide. The fee can vary from lender to lender and is typically stated as a percentage of your total loan amount, ranging from 1% to 5% of the loan amount.
Types of personal loans
Here’s a rundown of the most common types of personal loans:
- Unsecured personal loans: These are the most common type of loan available. These types of loans don’t require collateral, meaning you can borrow money without having to pledge any assets as collateral for repayment.
- Secured loans: If you have something valuable you can use as collateral, then you may be able to secure your loan with that asset instead of a bank guarantee. If you don’t pay back the loan, the lender can take your collateral property away from you and sell it to recoup its losses.
- Personal line of credit: Personal lines of credit operate like revolving credit cards — they’re suitable for ongoing spending needs or emergencies where you need quick access to cash. Unlike a credit card, though, personal lines of credit offer lower interest rates because they’re tied to a specific amount of money rather than an open-ended balance.
- Debt consolidation loans: A debt consolidation loan is designed to help you get out of under-interest credit card debt by consolidating it into a single loan with a lower interest rate. This makes it easier to pay off your debts without getting deeper into debt because you’ll have one lower monthly payment.
- Fixed-rate loans: A fixed-rate personal loan allows you to lock in an interest rate for the life of the loan (so long as it’s less than five years). If rates go up after you get approved for your loan, they won’t affect your monthly payments. Variable-rate loans have rates that change over time — sometimes daily — based on market conditions and other factors beyond your control.
- Variable-rate loans: A variable-rate personal loan has an adjustable interest rate that may change over time with market conditions and other factors beyond your control, including changes in federal funds rates.
What are the pros and cons of a personal loan?
Pros:
- Help borrowers build credit: Borrowers with a personal loan can improve their credit score and build a positive payment history. This is important because it can help you get better rates on future loans, such as mortgages and auto loans.
- Make it easy to consolidate debt: A personal loan can help you pay off multiple debt accounts, including credit cards and student loans, with one fixed monthly payment that’s easier to manage than multiple ones.
- Fast Access to Cash: A personal loan can be the perfect solution if you need cash quickly. Personal loans can be approved within 24 hours, and your money is deposited into your account in as little as one business day.
- Be used for almost anything: Personal loans are incredibly flexible, so you can use them to do almost anything. Whether you want to pay off debt, consolidate your credit card bills, or make a big purchase, a personal loan can help you get the money you need.
Cons:
- Accrue high-interest charges: The interest charges on a personal loan can be very high. This is because personal loans have a fixed interest rate, unlike other types of loans with lower interest charges.
- Lead to credit damage: When you borrow money from a lender and fail to pay it back on time, it can result in a bad credit rating. This means you will have difficulty getting loans from other lenders and financial institutions such as banks, credit unions, etc.
- Result in unnecessary debt: A personal loan is used for any purpose, including paying bills, medical expenses, buying new furniture etcetera but when used irresponsibly or taken without proper planning, it can lead to unnecessary debt, which can take years to get rid of.
What are the fees associated with personal loans?
Here’s what you can expect to pay:
- Application fee: Most lenders charge an application fee of $0 to $75, but some lenders allow you to skip the fee if you choose not to apply for a loan.
- Origination fee: The origination fee covers the lender’s costs associated with processing your loan application and preparing your loan for funding. The origination fee is often set at 1% or 2% of your loan amount, but it can be higher or lower depending on the lender.
- Prepayment penalty: A prepayment penalty is a fee charged by some lenders if you pay off your loan early — usually before the term ends or within six months of disbursement if you borrowed less than $10,000. You may also have to pay an additional interest rate adjustment if you refinance before the end of your term or pay off your loan early.
- Late payment fee: Most lenders don’t charge late fees until after several days past due, but some do charge them immediately after they’re due, which can be as much as $35 per month (or more).
How to choose the best personal loans
Here are some tips to help you choose the best personal loan.
- Evaluate the Interest rates: The interest rate on your loan will depend on the amount you borrow and the duration of the loan. You should go with a lender who offers lower interest rates and check out various offers before deciding.
- Consider the eligibility criteria: Several factors affect eligibility when it comes to personal loans. One such factor is income, which may be checked by an income verification process or through other means like past tax returns or pay slips submitted by employers. You may also be required to provide proof of residence and identification documents like a driving license, passport, etc.
- Enquire about additional fees: Any other expenses charged by lenders should be clarified before signing up for any deal. These could add up quickly and make your loan unaffordable in no time!
- Ensure repayment flexibility: If you have trouble making your monthly payments, make sure your lender offers flexible repayment options. Repayment flexibility is essential if you plan to take out a large loan and pay it back over several years. If your circumstances change, it’s nice to know that you won’t be stuck with a high monthly payment that makes it hard for you to keep up with payments later.