What You Need to Know About Personal Loans
There comes a time in many people’s lives when they find themselves in need of some extra money. Whether you’re trying to purchase a home, pay for your education, or pay for an emergency expense, it’s not always possible to afford these things out of pocket. When that’s the case, you may find yourself in need of a personal loan. But given the potential effect it can have on your finances, applying for a loan is never a small decision. What this means is that you’re going to need to have a clear understanding of what a credible personal loan looks like, what types are out there, how to apply for one, and all of the other important details surrounding them.
In this guide, we’re going to do our best to give you the information you need to make an informed decision when it comes to applying for an in-person or online personal loan.
What is a Personal Loan?
In simple terms, personal loans are intended to provide people with money to be used for some sort of personal use. As you zoom in on specific types of personal loans, you’ll see that some are designed to be used for a specific purpose. For example:
- A mortgage is meant to help you purchase property.
- An auto loan is designed to help you buy a car.
- Student loans are meant to help fund your education.
If you find yourself in need of some financial aid, you can apply for personal loans online or through a storefront location. If you do search these out online, you may be able to find fast personal loans that have a quick and straightforward application process. These are generally short-term loans that are intended to help you handle emergency expenses.
Common Types of Personal Loans
Personal loans are a fairly broad category of financial product, so it’s important to understand some of the different types of personal loans out there. There are even more types of personal loans that can fall within the categories we’re about to list, but if you do find yourself looking for one, it’ll likely be under one of these umbrellas.
1. Installment Loans
With an installment loan, you’ll be provided with funds (assuming you’re approved) in the form of a lump sum, which you’ll then need to repay with interest and/or fees over the course of several months, or even several years depending on the type of installment loan. These payments will be pre-determined in your personal loan agreement and will generally come in equal amounts. Because you’ll know when they’ll be coming ahead of time and how much they’ll be, it may give you a good chance to work them into your budget in advance. On top of these factors, your payments will be fairly spread out relative to certain other types of personal loans, which may help to ease the burden of repaying your loan.
Like we mentioned earlier, mortgages are a type of personal loan (specifically an installment loan) that are designed to help you purchase a home.
In the case of a mortgage, the loan you’re applying for is considered a secured loan. This means that in order to qualify, you’ll need to provide the financial institution with some form of collateral. With a mortgage, the collateral you’re providing is your equity in the house you’re purchasing.
When your offer on a home is accepted, you’ll typically be required to make a down payment, and your mortgage will fill in the remaining gap. You’ll then need to pay off the mortgage over the course of several years, sometimes decades.
3. A Personal Line of Credit
Unlike an installment loan, a line of credit is a personal loan that comes in the form of revolving credit. There are some important distinctions between this and certain other types of personal loans.
To begin with, instead of being provided with a lump sump, you’ll be approved for a particular credit limit. You’ll then be able to draw funds from this limit as long as you have available credit and your account is in good standing.
Instead of being tied to a particular amount of money, you’ll be able draw however much money you need (if it’s within your limit), whenever you need it. You’ll then be charged on the amount you’ve drawn from your personal line of credit, instead of the total amount of the credit limit you’ve been approved for.
4. Home Equity Lines of Credit (HELOC)
Similar to a mortgage, a HELOC is a secured personal loan, meaning you’ll need to provide collateral to get approved. In the case of a HELOC, the collateral you’ll be required to provide is the equity you have in your home. But unlike a mortgage, they’re not intended to help you buy a house.
Because they’re a form of revolving credit that work similarly to what we laid out in the previous section, they can be a useful safety net to have in place for things like home improvement projects where you don’t have a clear idea of the exact cost of the undertaking.
5. Credit Cards
Did you know that the credit cards in your wallet are also a form of personal loan? You may have gotten the hint when we were describing lines of credit, as there’s plenty of overlap between the two. For starters, credit cards are also a type of revolving credit. Just like a line of credit, you’ll be approved for a particular credit limit, and you’ll only need to pay interest and/or fees on the amount you borrow.
Another important quality of credit cards is that you’ll have the option to make a minimum payment every month if you don’t think you’ll be able to pay off what you’ve borrowed in full. This minimum payment allows you to make a small contribution towards what you owe in order to keep your account in good standing. However, it’s always a good idea to pay off as much as you’re able to in order to avoid the continuous build up of interest.
6. Student Loans
If you’ve ever had to put yourself through college or some other form of post secondary education, there’s a good chance that you’ve run into student loans before. This is a type of personal loan generally given out by the government that is meant to help you pay for schooling. The rates of these loans can be relatively low compared to many other types of personal loans and are often government subsidized. In many cases, your payments on your student loans won’t begin until you’ve finished your degree.
When to Consider Using a Personal Loan
Not only is it important to have a good idea of the types of personal loans that are out there, but another extremely important part of the equation is understanding when you should and shouldn’t consider applying for a personal loan. While this is a long list, we’ve narrowed it down to some common situations where it might be appropriate to apply for fast personal loans.
1. Emergency Auto Repairs
We all know that cars can be expensive to maintain, but if you’ve planned accordingly or simply have some extra room in your budget, car maintenance may be manageable for you to handle out of pocket. But the truth is, if you’re living on a tight budget, one emergency car repair can throw a huge wrench into your finances.
There are certain things you can do that might help you to avoid spending excessive fees on car repairs over the course of time, like:
- Doing some of the maintenance work yourself
- Making sure regular maintenance isn’t put off
- Finding a trustworthy mechanic
- Getting scheduled checks done on your car
However, some emergency car expenses may be impossible to see coming. Small personal loans may be able to help you out in these scenarios, especially when going without a car means having to miss time at work and dealing with the consequences of a lighter paycheck.
2. Emergency Medical and Dental Expenses
Without health insurance or a healthy amount of savings at the ready, an unexpected trip to the emergency room or some sort of unplanned medical expense can be tough to manage.
For starters, you’ll want to try to find some room in your budget to contribute towards an emergency fund to help you handle any unexpected medical expenses that may come your way. We know that this isn’t easy for everyone, particularly if you don’t have much room in your budget. But start small and go at your own pace. After all, anything extra helps in a time of need. Otherwise, a fast personal loan may be a useful option to help you manage this expense in the meantime.
3. Help with Home Repairs
If you end up buying a home at some point in your life, this will likely be the biggest expense you face. But the costs of homeownership don’t stop after your initial purchases. Emergency repairs can pop up any time, and they generally need to be taken care of right away. Unfortunately, they usually don’t come cheap. But putting them off can often lead to more serious problems, so it’s a good idea to handle these as soon as possible. If you don’t have the money on hand, a personal loan may be able to help.
Steps to Apply for a Personal Loan
Now that’ve we’ve gone over some common types of personal loans and looked at some scenarios where they might be of use, it’s time to look at some of the important steps involved with applying for them. The requirements for every personal loan may not be the same, but these are some general steps you can take that may help you through the process.
1. Check Your Credit Score
Because your credit score may play an important role in determining what types of loans you’ll be able to qualify for – and the rates of those loans – it’s a good idea to start this process by checking your credit score. You can do this by:
- Buying this information from a major credit bureau (Equifax, TransUnion, or Experian), or even purchasing it from FICO.
- Looking for a free credit score service online.
- Taking a look at your loan or credit card statements.
2. Look at Your Budget and Figure Out What You Can Afford
You never want to apply for a loan you won’t be able to afford, so you’ll want to start by looking through your budget to see how much room you might have for potential loan payments.
To help you get a clearer picture of this, look online for a loan calculator. By entering your loan details, this can help you get a better idea of what a particular small personal loan may cost you. You can then see if these payments will fit into your budget.
3. Research Potential Options Online
Now it’s time to assess what your potential options are for an in-person or online personal loan. Simply do a Google search for the type of personal loan you’re looking for, pull up the potential options, and compare the important details. You may find this process to be fairly straightforward with personal loans online as financial institutions that provide or service these loans generally have all of the relevant details listed on their websites.
4. Organize Your Personal Information
Before you actually submit an application for a personal loan, it may be a good idea to have your personal information ready ahead of time. While there may not be the same requirements for every loan, there are some general things that are likely to come up during the application process, like:
- Your contact information
- Proof of employment
- Income information
- Bank statements
- Proof of assets
- Social security number
5. Select an Offer
Finally getting approved for a loan can be an exciting prospect, but you don’t want to stumble at the final blocks. Make sure to take your time when accepting a loan offer, and don’t get pressured into signing a personal loan agreement, even if your offer has an expiration date.
If you have more than one offer on the table, review them all carefully. Look into the financial institutions that are offering them, ensure that they’re a responsible lender or servicer, and go with the personal loan that’s best suited to your needs.
Educate Yourself on Personal Loans
Because of their diversity, personal loans can help you in plenty of different situations. Whether you’re looking for a fast personal loan to help you handle an emergency expense, or you need a mortgage to help you buy a home, they can be useful financial tools if used correctly. But if you don’t approach this process carefully, you can do some serious damage to your financial standing.
So, before you decide to apply for a personal loan, make sure to understand what types are out there, when they should and shouldn’t be used, and that you can actually afford to pay one off. Overall, educate yourself as much as possible to make sure you’re making an informed decision!