How do personal loans work?

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Personal loans can help you achieve a variety of financial goals. Find out how they work and where to get one. (Shutterstock)

A personal loan is a fixed amount of money that you borrow from a lender and pay back with interest over a period of time. It’s usually unsecured, meaning you don’t have to provide collateral like your home or car. You can use a personal loan for this consolidate debtPay medical bills, fund home improvement projects, or cover virtually any other expense.

Visit credible View your prequalified personal loan rates from different lenders, all in one place.

What is a personal loan?

A personal loan is a product offered by financial institutions such as banks, credit unions, and online lenders. Once you take out one, you pay it back in equal installments with interest over a period of time. Repayment periods can range from a few months to a few years or even longer.

Most personal loans are unsecured, so you don’t have to worry about risking collateral. Instead, factors like your credit rating and income determine whether you qualify and what interest rate you get. For secured personal loans, you must provide collateral such as jewelry or a car.

Because they are less risky for lenders, secured loans could be lower Interest charges as unsecured loans. You may find it easier to qualify for an unsecured loan if you have bad or fair credit. Just remember that the lender has the right to confiscate your collateral if you are unable to make your payments.

How do personal loans work?

A personal loan is an installment loan, which means that you receive all the borrowed money in one sum. Your repayment period depends on the lender and your particular situation. If you opt for a fixed-rate loan, the interest rate remains the same over the entire term. An adjustable rate loan, on the other hand, has a fluctuating interest rate that can go up or down.

Most lenders allow you to apply for a personal loan from the comfort of your own home. You must provide some basic personal and financial information. You may also need to submit some documents, e.g. B. an official ID and your payslips.

The financing period for a personal loan is usually only a few working days. However, some lenders offer same-day or next-day financing after they approve you. This is great news if you have emergency expenses and need the money right away.

Believable makes it easy Compare personal loan rates from different lenders without affecting your credit score.

How much does a personal loan cost?

A number of factors affect how much you pay for a personal loan, including your loan, your income, the interest rate, fees, and the amount you borrow. The lender you choose also plays a role in the cost of your personal loan.

It’s a good idea to only borrow what you need to keep your repayment costs as low as possible. You can use credibles personal loan calculator to estimate your monthly payments and how much you will pay over the life of the loan.

Pros and cons of personal loans

Before you take out a personal loan, you should weigh the pros and cons.

advantages

  • Bad reviews – Compared to credit cards and other lending products, personal loans offer low interest rates. A lower interest rate can save you hundreds or even thousands of dollars over the life of the loan.
  • Flexible — You can Use the funds from a personal loan to pay for almost all expenses. This can be a car repair, a kitchen remodel, or even a vacation.
  • Potentially quick funding — Some lenders will fund your loan shortly after your approval. Depending on the lender, you may be able to receive your money the same or next business day after approval.
  • Can help you build credit — As long as you make your payments on time every time, a personal loan could improve your credit score. A higher credit rating can open the doors to lower interest rates and more favorable terms in the future.

Disadvantages

  • Must meet certain eligibility requirements – Most personal lenders require a certain credit rating and a steady income. It can be difficult to get approval if you don’t have the best credit.
  • Interest and Fees — Personal loans are not free. Once you commit to one, you must pay interest and any fees the lender charges, such as B. Handling Fees and Late Payment Fees.
  • Incur more debt A personal loan increases your debt burden. If you’re already drowning in debt from things like credit card debt, student loans, and car loans, adding an extra debt payment each month might be difficult.
  • Can damage your credit score – Even one missed payment can lower your credit score. A lower credit rating limits the loan products you are eligible for and you are likely to receive higher interest rates on loan products.

How to get a personal loan

If you are interested in applying for a personal loan, follow these steps:

  1. Check your credit. Because most lenders look at your credit score when deciding whether to approve a loan, it’s a good idea to check your credit score before applying for a loan. Go to AnnualCreditReport.com to request copies of your credit reports from all three major credit reporting agencies. Point out any mistakes or inaccuracies that could lower your score.
  2. Shopping spree. Not all personal loans are created equal. That’s why you should do your research and explore all your options with banks, credit unions, and online lenders. Compare interest rates, fees, terms, qualification requirements, and funding times to find an option that’s right for you.
  3. be prequalified. The prequalification process can help you understand if you are likely to be approved for a loan and what loan terms you may be setting. To prequalify, you typically need to provide how much you want to borrow, how you will use the funds, your annual income, your employment status, and the last four digits of your social security number. If you pre-qualify, the lender will usually make a gentle loan request that doesn’t hurt your credit score.
  4. Apply. Once you have found a loan offer that you wish to proceed with, you will need to complete a formal application. Be prepared to provide your name, address, phone number, date of birth, employment status and income. You will also need to submit documents such as payslips or bank statements. During this step, the lender may perform a hard credit pull, which will temporarily lower your score.
  5. Get financed. Once approved, the lender will deposit your money, usually by direct deposit into your bank account. Depending on the lender, you can get the loan funds the same day, the next business day, or within a few business days.

When you’re ready to apply for a personal loan, Credible can help you quickly and easily Compare personal loan rates to find one that best suits your needs.

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