A Personal loan can be a great option to help you cover large expenses that you can’t afford on your own.
But what exactly are personal loans? Should you apply for one?
Many people aren’t familiar with what personal loans are, how they can be used, and how to apply for one.
Before deciding whether or not to take out a personal loan, here are a few things to consider.
What are Personal Loans?
Basically, personal loans are loans that are borrowed from banks, credit unions, or alternative lenders and can be used for just about any expense.
While student loans, for example, can typically only be used to cover education expenses, personal loans can generally be used for any reason — from debt consolidation to paying for a big vacation.
When you’re approved for a personal loan, your lender will disburse your money, which you have to repay over a predetermined number of years, plus interest.
Before taking out a personal loan, you should understand the difference between secured and unsecured loans and fixed and variable interest rates.
Unsecured vs. Secured Loans
Unsecured loans are loans that don’t require you to put up any collateral.
Collateral is property that you use to secure the loan in case of default. If you aren’t able to pay back the loan, your lender can seize the collateral to pay off the remainder of the loan.
Secured loans, on the other hand, do require collateral. They require you to put up a valuable piece of property to protect the lender in case you can’t make your monthly payments.
Personal loans can be secured or unsecured. Though, they are typically unsecured.
As a result, personal loans can be harder to be approved for and have higher interest rates. This is because unsecured loans require lenders to take on more risk.
Fixed-Interest vs. Variable-Interest
Fixed-interest rates are interest rates which remain the same throughout the term of your loan.
Variable-interest rates start lower and gradually increase over time.
Personal loans typically have fixed-interest rates — meaning, you won’t have to worry about your payments increasing over time.
Should You Take Out a Personal Loan?
Ultimately, the decision to take out a personal loan depends on your reason for needing a loan.
It’s up to you to decide whether or not the reason justifies the debt you will be taking on.
If the reason you want a loan is to pay for a car or vacation, the answer to this question is probably no.
However, if you are in an emergency financial situation, personal loans offer a great way to get cash quick to cover your necessary expenses.
How to Apply for a Personal Loan
Applying for a personal loan is fairly easy. You’ll be required to provide some basic information, including:
- Credit history
- Bank statements
- Personal identification
- Reason for taking out the loan
- Debt history
- And other similar information
The most important thing to do when applying for a loan is to compare many different lenders to find the best terms and lowest interest rates.
All you need to do is search online for lenders near you to find the best option for you.