A personal loan lets individuals borrow a lump sum of money, usually between $1,000 and $50,000. You can later repay it in monthly installments over a fixed term at a fixed interest rate. It is an excellent option for consolidating debt and large one-time expenses since you don’t need collateral to borrow the loan.
How does a personal loan work?
The interest rate of loans and credit cards is calculated as APR (Annual Percentage Rate). This percentage is the interest for your loans and any fees that are charged for processing, combined.
Banks, credit unions, and online lenders are common sources you can get a personal loan from. You may apply either online or by visiting one of their branches. To approve you for a loan, lenders take many factors into consideration (financial history, current income, etc.). This is done in order to measure the risks of lending you money.
Once your loan is approved, the amount is directly credited into your bank account. Throughout the term of the loan, you are then required to make fixed payments in monthly installments (which include the interest).
If you’re creditworthy, you will be eligible for longer and larger loans. This is how personal loans work. Usually, you may be able to borrow up to $100,000 depending on your income and assets. Repayment can be done in 1-7 years.
In December 2024, the APR for personal loans is in the range of 11.30 to 20.28 percent.
What is the benefit of obtaining a personal loan?
There are a lot of hidden advantages of a personal loan. We’ve listed some of them for you:
- Covers different expenses
- Ideal for debt consolidation
- Quick, lump-sum funds
- Predictable, fixed monthly repayments
- Timely repayment = improved credit score
- Higher borrowing limits than credit cards
- Lower interest rates than credit cards
- Flexible, longer repayment terms
- No collateral requirement
- Easy application process
Types of Personal Loans
If you’re unsure about repaying a fixed amount each month, you may want to consider a flexible loan. What is a flexible personal loan? It is an unsecured loan similar to a revolving line of credit, such as a credit card. You are not required to take out the entire loan amount at once. Instead, you can borrow as needed, make payments as you wish, and borrow again, keeping in mind the maximum limit of your loan.
Let’s use an example to understand this. If you take out a Flex Loan with a maximum limit of $2,000, you can choose not to borrow the entire amount at once.
For example, you could borrow $500 now and repay $300 in 15 days (prepayments don’t result in penalties). That leaves you with $200 owed, and you’ll still be able to borrow up to the remaining $1800 limit. You can even make additional payments without incurring penalties.
One major drawback to these loans, however, is their high interest rates.
Am I eligible for a personal loan?
There are several considerations for estimating your personal loan eligibility. Usually, a good credit score, steady income, and debt-to-income ratio are what most lenders take into account.
What credit score is good for a personal loan?
While it really depends on the lender (some lenders don’t check credit scores at all), anything over 580 is fruitful. You’ll find plenty of lenders out there who won’t ask you about your credit score.
MyPayDayLoansOnline is one such lender. It offers personal loans based on your income. People who have a steady income but a dull credit score can try opting for these types of lenders.
How to take out a personal loan?
For taking out a personal loan, you must simply start by applying. If you’re planning to opt for an online lender, go to their website and search for an application form. Fill in credentials where they can reach you. Collect the necessary documents ahead of time to speed up the process.
Here’s what you’ll need:
- Government-issued ID (driving license, passport)
- Proof of income (pay stubs, tax returns, bank statements)
- Proof of address (rental agreement, utility bills)
- A bank account
Once you have applied, your part is done. Wait for an approval from the lender’s end.
How difficult is it to get a personal loan?
When you have got a good credit score, getting a personal loan is not difficult. However, lenders will reject your loan application if they discover that you already have debt or don’t have a steady income.
The easiest way to get a loan without a good score is to apply with a co-signer (someone who agrees to repay the loan if you are unable to).
Is a personal loan a good idea for you?
Whether taking a personal loan is a good idea or not depends entirely on your specific needs. Generally, it is considered a much safer option compared to other types of loans. Interest rates are manageable, unlike payday loans. Repayments are divided into monthly installments, which makes it easier to pay off.
You may consider a personal loan to pay back another high-interest loan or for other large expenses. The key is to find a lender that offers a favorable interest rate.
However, if you’re not sure you’ll be able to repay each month, it’s best to look at other alternatives.
Individuals are advised not to borrow more than they can afford. It will only result in you paying more for the loan than you need to and potentially getting into debt.
In Summary
Taking out a personal loan can prove advantageous if you incorporate long-term financial planning. We have covered all the basics about what a personal loan is, how it works, whether it is a good choice, etc. If you want to take one, make sure you find a legitimate lender through thorough research. Remember not to rush into anything. It is important to plan before committing to any financial tool.
