Whether it’s to cover unexpected expenses or consolidate debt, there are times when a little extra cash can make a big difference. A personal loan can supply those funds and more, but it’s important to know all of the details before you borrow. In this article, we’ll break down everything you need to know about a personal loan so that you can decide if it’s the right financing option for your financial goals.
The most important factor to consider when deciding if a personal loan is right for you is the amount of money that you’ll be borrowing and how it will be paid back. Personal loans typically come with a set amount of money and a fixed interest rate that you’ll pay back in monthly installments over a set term, which can range from a few months to several years. As long as you make your payments on time, your credit score should improve over the life of the loan.
Personal loans are generally available from banks and online lenders. They may be secured or unsecured. Secured personal loans are backed by an asset, such as your home or car, that the lender can claim if you fail to make your payments. Unsecured personal loans are not backed by any asset and instead, your lender will determine if you qualify based on factors like your credit history and income.
Before you apply for a personal loan, it’s helpful to compare lenders and their rates and fees. You can usually prequalify for a personal loan with many lenders without submitting a full application, which will trigger a hard inquiry and possibly a temporary dip in your credit score. You should also check the minimum requirements for the loan, such as credit score and income, to ensure that you’ll be able to meet the terms of the agreement.
Once you find a lender that meets your minimum requirements, submit an official application with the required documentation. This will require a copy of your driver’s license and other information, depending on the lender. After you’ve formally applied for the loan, your lender will review your application and submissions and, if approved, will send you the loan funds by wire transfer or paper check. You’ll receive a promissory note that defines your loan terms and conditions, including the applicable interest rate and repayment schedule.
Once you receive your loan funds, start repayment as soon as possible to avoid late fees and credit damage. It’s also a good idea to set up payment reminders so that you don’t miss any payments. If you’re having trouble making your monthly payments, try to negotiate with your lender. They may be willing to reduce or extend your terms, which can help you manage your budget and repay the debt on time. If you’re unable to reach an agreement, you could consider alternatives to personal loans, such as a debt consolidation loan or a deferred payment plan.