You can take out a personal loan for almost any purpose. That’s why this loan type has grown in popularity over the years. About 20.2 million people around the country use personal loans for various expenses.
Understanding Personal Loan
Loans come in different forms, and they include mortgages, credit cards, auto loans, and personal loans. Each credit type has a specific purpose, which helps you to meet a particular need. The need could be buying a new car, paying for a house, or breaking a large purchase into several monthly payments.
A personal loan is a loan type that helps you consolidate multiple debts to enjoy lower cost and a single monthly payment. You may take out a personal loan to help pay for medical or education expenses, or to purchase a house item like an appliance or furnace.
Applying for a personal loan translates to asking for a certain amount of money from a lending institution of your choice, such as banks, credit unions, and online lenders like CreditNinja.
It’s vital to know that repaying a personal loan isn’t the same as repaying your credit card debts. With a personal loan, you’ll need to pay back the loan amount in fixed monthly payments over a stipulated period until you’ve fully repaid the loan.
What To Consider
Before you choose to get a personal loan, it’s helpful to first ask the following fundamental questions:
How Much Do You Need?
Knowing how much money you need is the first step in getting a personal loan. Some lenders can offer the smallest amount of $500. However, most of them offer a minimum amount of $1,000 to $2,000. If you need an amount less than $500, it might help if you save up extra cash instead.
Do You Want to Pay Your Creditors Directly or Through Your Bank Account?
If you choose to get a personal loan, the loan amount is usually sent to your checking account directly. However, if you are using a personal loan for debt consolidation, some lenders offer the choice to send the money to your other creditors. The funds will not pass through your bank account at all.
How Long Will You Need To Pay The Loan Back?
Most of the time, you’ll need to start paying your loan within 30 days. This is done in monthly installments. Most lenders tend to provide borrowers with repayment terms that run between six months to seven years. However, you should take note that the length of your personal loan will impact your monthly payment and its interest rate.
How Much Should You Pay In Interest?
The interest rate of your loan depends on several factors, which include your credit score, loan term, and loan amount. Interest rates can start at 3.49% and get as high as 29.99%.
Typically, you’ll receive a low interest rate from your lender if you have a good credit score and if you choose a short repayment term. The average annual percentage rate (APR) for two-year personal loans is 9.63%. Also, personal loan APR is most likely fixed, meaning that it remains the same until the loan ends.
Can You Afford The Monthly Installments?
When it comes to getting a personal loan, you’ll be asked to choose which repayment plan best fits your income and cash flow. Lenders tend to offer incentives for using autopay in your monthly payments. Most of the time, the incentive is lowering your APR by 0.50%.
Several borrowers prefer to choose a low monthly payment. That’s why they tend to select a repayment plan that’s intended for several months or years. On the other hand, a few borrowers would like to pay their loan as fast as possible. So they choose to get a repayment plan with the highest monthly payment over a few months.
Low monthly payments usually come with high-interest rates. At first, you might think this isn’t the case since your monthly payments are smaller. However, you’ll actually end up paying more for your loan over its lifetime.
In a Nutshell
Personal loans can be used for almost anything. However, before getting one, it’s advisable to consider some factors first. These factors include the amount you need, the interest rates you need to pay, and the budget you have for monthly payments.
