When it comes to getting cash fast, some people turn to credit cards. But another popular tool is personal loans.
In fact, they are so popular that 34 percent of Americans have taken out a personal loan in the last year.
If you’ve been considering applying for a personal loan, keep reading. We’re bringing you everything you need to know about getting a personal loan, and when they may or may not be a smart choice for you.
How Personal Loans Work
Before you apply for one, it’s important to learn what exactly what is a personal loan is.
So how do personal loans work anyway?
Personal loans are different from other types of loans. Unlike a mortgage, where you never actually handle the money that you’ve been approved for, you’ll actually receive the money that you apply for.
A personal loan is what is called an installment loan. That means that you apply for a loan and receive a lump sum. You have access to that sum of money right away. You can use it to make a big purchase, like a new car or other big expense, or use it to pay off debt.
Personal loan requirements state that you’ll pay back your loan, with interest, in monthly installments. The amount of money you borrow and the terms of your loan determine how much interest you’ll have to pay back, as well as how long you’ll have to pay it back.
Your loan repayment term could be anywhere from 12 months to 84 months. The longer you have to pay back your loan, the lower your payments will be. But a longer-term loan also means that you’ll pay more interest over time.
Types of Personal Loans
There are two main types of personal loans.
The first is an unsecured loan. With this type of loan, the lender will use your credit history to determine whether you are eligible for the loan, as well as how much money you are eligible to borrow and what your interest rate will be.
If you fail to pay back an unsecured loan or make late payments, your credit score will suffer.
The second type of loan is a secured loan. With this type of loan, your credit history isn’t used to determine whether you are eligible for a loan or how much you can borrow.
Instead, you’ll need to put up some kind of collateral in order to get your loan.
Your collateral could be a savings account or financial CD, or other types of collateral worth a large sum of money. The value of your collateral will determine how much money you can borrow, and what your interest rate will be.
If you default on a secured loan, the lender can take the item that you used as collateral.
Choosing Between Secured and Unsecured Loans
There are a number of benefits and drawbacks to each type of loan. To get an unsecured loan, you’ll need a strong or at least a decent credit history. If you have a poor credit score, you likely won’t be eligible for an unsecured loan.
Even just applying for an unsecured loan can hurt your credit. That’s because the lender will run what is called a hard inquiry to determine whether or not you are eligible for the loan.
If you’re trying to figure out how to get approved for a personal loan when your credit score is far from perfect, a secured loan might be the answer.
But with a secured loan, you could be risking your savings account or whatever else you’ve used for collateral.
Choosing the right personal loan for you starts with choosing the right loan provider. Learn more about 2019’s top loan providers here.
Reasons You Might Need a Personal Loan
There are a number of reasons why a personal loan might be a good choice for you.
If you need to make a big purchase but don’t have the cash, a personal loan is a great choice. You’ll get monthly payments that are easier to manage, and can make your purchase right away rather than spending months or even longer saving up the money you would need.
Another situation in which a personal loan can help is when you’re trying to pay down debt from multiple sources.
If you have several credit cards with outstanding balances, it can be tough to get ahead. Most credit cards have incredibly high interest rates, which can make it feel like you are barely making a dent in your debt each month.
A personal loan with a lower interest rate will let you pay off your credit card debt right away. Then, you can pay your personal loan off with monthly payments and accumulate less interest, making it much easier to claw your way out of debt.
Times You Should Not Apply for a Personal Loan
While personal loans can help you get out from under credit card debt or make a big, necessary purchase that you don’t have the cash for, there are some situations that a personal loan shouldn’t be used in.
For instance, if you need money for college, loans designed for students are a better choice. The interest rates and terms are often much more relaxed with student loans compared to personal loans. You can also often put off paying back student loans until after you have graduated, giving you a chance to start working a new, better paying job first.
Another situation in which a personal loan is a bad choice is when you’re looking to splurge on a big vacation or a fun purchase like new furniture.
If you can’t afford these expenses with cash, you likely can’t really afford them with a loan either. Giving in and applying for a personal loan and putting yourself in debt for a fun purchase is never a smart financial decision.
The average American household has more than $137,000 in debt. Your financial decisions should always focus on getting out of debt, rather than further into it.
Getting a Personal Loan
Getting a personal loan can help you pay down credit card debt or give you the cash you need in an emergency, fast.
But can installment loans such as a personal loan actually hurt your credit? Learn everything you need to know here.