Personal loans are funds borrowed from online lenders, credit unions or banks. You may use a personal loan for whatever reason you wish. You will receive a personal loan as a lump sum of money, but you will need to pay back a personal loan through monthly payments. Typically, the repayment terms for personal loans range from 2 – 6 years.
Lenders decide how much you can borrow based on factors including your debt-to-income ratio and your credit history.
The rates of interest can range from 6 percent to 36 percent annual percentage rate (APR). Depending on the loan, the interest rate may be fixed (staying the same) or variable (may go up or down over time).
Personal loans may be either secured or unsecured. A secured loan means that your loan is backed by your personal property or assets, like your home or stocks you own. These forms of collateral work as a kind of insurance for the lender.
If you have a low credit score, it may be easier to get a secured loan. Secured loans also tend to have lower interest rates, making them cheaper than an unsecured loan. However, if you default on the secured loan, you can lose your property or asset.
If there is no collateral backing for a personal loan, this means it is an unsecured loan. Instead of requiring collateral, your personal loans are approved based on your creditworthiness.
While you can use a personal loan to fund anything, you may consider getting one to help build your credit, start a business or consolidate your existing debt.
Pros: Personal loans can be a good choice to finance major purchases such as moving expenses, medical bills or home improvement projects. A low-interest personal loan is also great as a way to consolidate high-interest debts, such as credit card debt.
You may apply for a loan in the amount you owe on your credit cards to consolidate your debts. If you are approved the entire amount, you can use the funds to pay off your credit cards instead of paying monthly on multiple accounts. Then, you can pay off just the one loan at a lower interest rate.
Cons: You may be penalized if you pay off the loan before loan term is up.
Qualifying for a loan and getting approved for the amount you need will depend on your credit score.