By Valery Goncharevko
Simply put, a personal loan is a cash advance borrowed from a bank or online lender that you must repay in equal monthly installments (NDE). However, in traditional finance, personal loans are known as short- to medium-term repayment alternatives for achieving financial goals, whether you’re looking to consolidate high-interest debt, start a business, or pay in case of emergency.
A personal loan can be quite expensive compared to other forms of financing, and it may not be the right choice in all scenarios. Here are some things to consider before shopping for a personal loan.
What is a personal loan used for?
Personal loans, also called signature loans and debt consolidation loans, offer more freedom in where the money is used. Personal loans almost always come in the form of unsecured loans, which means you won’t have to back your loan with collateral. On the other hand, a secured loan requires a mandatory guarantee to ensure that a borrower will meet his contractual obligations, thus making payments on time. Personal loans can be fixed rate or real interest rate and payback periods ranging from a few months to ten years (although some can be extended).
However, keep in mind that some lenders may place limits on how you can use your funds. Some states, for example, may prohibit spending money on education. Therefore, make sure you can use a personal loan for its intended purpose by checking with the lender beforehand.
When is a personal loan a good idea?
Although a personal loan can be used for almost anything, that doesn’t mean it’s always a good idea. In general, taking out a personal loan to improve your financial situation or provide essential finance is a great option. Here are several common examples:
Debt Consolidation: Combining multiple loans into one monthly bill (like high-interest credit card debt) is always a good idea. A personal loan can offer a set repayment period to help you keep track of your finances even if you don’t plan on saving money on a low-interest personal loan.
Home renovation: If you are looking for a home improvement loan, going for a personal loan may be a much better option than a home equity loan or HELOC since these loans require a mandatory guarantee. Therefore, you risk losing your assets if you default on a loan.
Emergency room : Ideally, you would have enough money saved for unexpected expenses. However, life isn’t always perfect and if you quit your job, your car needs a quick fix, or a household item needs fixing, a personal loan can help you relax when you’re short on cash. .
Major life events: Weddings, divorces or funerals can be expensive, but it’s not always easy to save money for such important life events. A personal loan can help you get the money you need at the right time in difficult financial situations.
What to consider when considering getting a personal loan?
Before getting a personal loan, do your research and evaluate the opportunities to get the best deal possible. Even if your bank or a local credit union offers you a good deal, don’t rush to accept it because you might be able to get a better deal elsewhere. What to pay close attention to when taking out a loan:
Interest rate: The cost of a loan is mainly reflected in the interest rate. According toon average, personal loan rates vary by 9.4%, but depending on your credit and financial situation, your proposed rates may be higher or lower.
Term of the loan: Consider credit repayment terms as they affect your minimum monthly payment. Indeed, the longer your credit repayment plan, the lower your monthly payment will be. However, you can save more money on interest with a short repayment schedule.
Costs: In addition to interest rates, lenders may impose additional fees, thereby increasing the annual percentage rate (APR) of your loan. For example, origination fees are deducted from the principal amount. Additionally, lenders can impose late and prepayment penalties if you are late on your payment or decide to pay off your debt early.
Duration of financing: Many creditors offer same-day financing, while others may take a few days to transfer money to your bank account. Consider these timeframes depending on how quickly you want to get funds.
Before you submit your loan application, many personal lenders may offer to prequalify you with a rate quote. This procedure usually involves a soft credit application, which has no impact on your credit score. This method allows you to evaluate loan possibilities side by side and choose the one that best suits your needs.