Understanding Personal Loans
As more and more Americans are facing financial struggle, many people are turning to different ways to make up for the lost income. Luckily, there are options besides credit cards that can help with this problem. Personal loans may be an option that you may want to consider. Before you decide to go with this financing opportunity, you should understand them fully so that you can make an educated decision.
What is a Personal Loan?
There are many types of personal loans, but the main difference is that they are either secured or unsecured. When you have a loan that is secured, that means it is backed by a collateral asset. A collateral asset just ensures that the borrower needs to repay the loan or that asset will be taken away. Common examples of this type of loan is with car loans and mortgages. If you don’t repay your car loan, then your car gets taken away and if you don’t repay your mortgage then your house gets taken away. The bank will collect the assets that are associated with the loan.
When you have a personal loan that is unsecured, then you have no type of collateral asset securing that you will repay the loan. That means if you don’t repay the amount you owe, then the bank cannot collect anything. However, this is not a free pass to not be responsible with your loan. If you do not repay it, then you will face potential lawsuits, raise the cost of borrowing, and hurt your credit score.
Regardless of whether or not the loan is secured or unsecured, these personal funds are given to borrowers as a lump sum directly deposited into the selected bank account. The repayment terms for these loans vary by lender but typically involve a fixed interest rate over a fixed repayment term typically between 1-10 years. If you aren’t sure the exact amount of money you will need, then you can opt for a personal line of credit as opposed to a loan. A personal line of credit acts like a traditional credit card but there are a couple differences. The biggest difference is the fact that the interest rate on the card depends on the current state of the economic market.
How Much Can You Borrow?
The amount you can borrow varies per person. However, credit plays a key factor into dictating what would be the amount of money you can borrow. There are many different creditors that report on your credit score however websites like Credit Karma allow you to track your score for free while looking at the three most common creditors ratings all without hurting your score. The scale your credit falls on is between 300 to 850. A majority of lenders require an average score of at least 660 in order to secure a personal loan. If your score is lower than that average requirement then it would be too high of an interest rate which makes the loan less helpful. The higher your credit score then the better interest rate you will receive.
What are the Downsides?
While a personal loan may seem like a great way to handle your finances, there are also aspects that you need to be aware of. If you opt for a personal loan with a long repayment period, then you will end up paying more money. Even though the longer the loan term, the lower the monthly payment, you end up paying more overall because of the interest rate on the loan. It is also important to know that depending on your lender, you may also have other fees associated with getting this loan like origination fees as well prepayment penalties. This can also make getting the loan more expensive. Even though these fees and penalties are not common, they are still something you should be aware of.
If you need some extra cash and you have good credit, then this should be an option you look into. If your credit isn’t where it should be, this is still an option to consider because the higher interest rate you pay may be worth the immediate assistance. You need to evaluate your financial situation in order to make the right decision! Don’t try to put yourself in an even worse position where you end up paying thousands of dollars extra in the long run.