Personal loans are one of the most popular ways to finance your life.
They come in many forms. Some are designed to help you pay for certain big-ticket items (like a house or car). Others may be geared toward helping you set aside money toward something specific (like student loan repayment or a down payment on a home).
Personal loans can seem like an easy way to get money until you start thinking about how it will impact your financial future. After all, these loans are meant to fund short-term expenses that won’t have an effect on your debt profile over the long term.
But with so many options, how do you know which type is right for you?
What is a personal loan?
A personal loan is an unsecured loan that you take out and that doesn’t need collateral.
These loans are designed to help you finance short-term debt without having to deal with the consequences of interest.
There are many types of personal loans, but some of the most common ones are for students, mortgages, medical emergencies, and car purchases.
Personal loans are available in a variety of forms including credit cards, home equity line of credit (HELOC), and installment plans. Another option is a payday loan; these short-term loans are typically offered by local lenders with high interest rates.
Uses for a personal loan
If you need something that you can’t afford up front, personal loans are a great way to get it. If you want to buy something big like a car or house, personal loans are also a great way to finance the purchase.
If you want to invest in yourself and set money aside for things like retirement or college tuition, a personal loan is an easy way to do that.
You may even be able to use them to help pay off other debts like credit cards or student loans. In some cases, they can even help with special expenses (like medical costs).
Ways A Personal Loan Could Help You Save Money
A personal loan may help you save money by:
- Helping you buy goods that otherwise would not have been possible
- Providing an emergency source of income
- Helping take the pressure off your credit cards during tough financial times
- Covering a short-term expense, like a vacation or a medical procedure.
- If you need to make a big purchase but don’t want to go into more debt, a personal loan could help you pay for it without making your financial situation worse.
Types of personal loans
There are two basic types of personal loans: secured and unsecured.
A secured loan is a type of loan that is backed by an asset, like a house or car. This means that if you can’t repay the loan, the lender can take your asset. Secured loans can be used for big-ticket items like a house or car, or for smaller purchases like furniture or appliances.
Rates for secured loans are about 8-10% APR
Unsecured loans can be used for virtually anything, but the borrower is at risk of losing all the money if the loan isn’t repaid.
The rates for unsecured loans can be upwards of 20% APR. The interest rates on these loans are higher because there is more risk involved for the lender with them than a secured loan.
If you can’t afford to pay the loan back quickly, you’ll end up paying more in interest fees over time.
What if there are missed payments?
If you can’t make your payments, your lender could take legal action against you which could lead to wage garnishment or even bankruptcy.
If this happens personal loans can damage your credit score.
If you don’t make your payments on time, your credit score will suffer. This will make it harder for you to get approved for loans in the future. And if you do get approved, you’ll likely have to pay higher interest rates for any future loans.
How to get a personal loan
First, research your options to ensure you are getting the best deal. There are many different types of personal loans available. Some have high interest rates, some have high fees, and some have long terms. Compare all these factors before deciding which type of loan is right for you.
Second, decide what type of loan best fits your needs. Some loans are designed for short-term expenses (such as a vacation), others for long-term goals (such as buying a home).
Third, Make sure you understand the terms of the loan. Be sure to ask questions if there’s anything you don’t understand.
Fourth, decide how much money you want to borrow and how quickly you need it. Some loans will need a lump sum payment up front or over time. Others may allow you to take out small payments over time with no upfront costs at all.
Fifth, The way you repay a loan can vary. For some loans, it will depend on your income and other factors, like your credit history. For others, the repayment schedule is set in advance and only changes if your income goes up or down.
Sixth, Some lenders will need collateral for a loan if they believe there is a high chance of default. Some lenders may offer lower interest rates or other incentives if the borrower is not at risk of defaulting.
Personal loans can be a great way to get the money you need. They are easy to access and they don’t have the same restrictions that credit cards have.
Before taking out a personal loan, be sure to understand the terms and compare interest rates from different lenders
As already mentioned, personal loans are secured or unsecured.
When you take out a secured loan, you use an asset as collateral to guarantee the loan. This means that the lender can take your property if you can’t repay the loan.
Unsecured loans don’t have this kind of security, so they’re riskier for the lender. As a result, unsecured loans usually have lower interest rates.
Your credit history isn’t always a good predictor of how well you’ll handle a personal loan in the future. That’s why it’s important to understand the terms of any loan you’re considering and compare interest rates from different lenders.
Think about your current situation and what you want to do with the money before choosing which type of loan is best for you. Make sure you know how much each option will cost so that you can make an informed decision.*Editorial note: The content of this post is based solely on the author’s opinions, and should not be considered as fact or advice. We strongly recommend seeking professional help when dealing with financial issues
