Getting a personal loan could be the answer to your financial difficulties. Whether you’re looking for some money to pay your bills, finance an unexpected emergency or pay for a medical bill, getting a personal loan could help.
However, this is a huge decision, and there are many factors you should consider when picking a personal loan. You will want to determine the reason for seeking a loan, your assets, personal income, existing personal loans, and long-term financial goals.
Unfortunately, taking a loan could also hurt your financial health if you don’t plan for it adequately. You can get a personal loan from financial institutions, banks, and other online lenders.
They also have lesser documentation requirements, little to no security or collateral. Thus, it’s easy for individuals to misuse personal loans. Below are factors you should consider when picking a personal loan:
There are different types of loan products available to individuals today. Understanding your options is the first step to helping you find the money you need. Below are the different types of personal loans:
Unsecured loans are not backed by security or collateral. They are also relatively easy to acquire and are paid back in monthly installments. To get approved for an unsecured loan, you will need an excellent credit history.
If you have excellent credit, lenders could give you a personal loan of up to $100,000. However, lenders usually offer personal unsecured loans of around $1,000 to $50,000. The loan repayment term may range from 1-6 years.
Personal unsecured loans may have interest rates of around 3% to 36%. However, the rates depend on the lender and your credit history.
A secured personal loan is paid in installments, and the lender requires collateral to back the loan. Collateral could be your home, car, or other personal or business assets you have. If the borrower fails to pay back the loan, the asset is seized and repossessed by the lender.
A secured loan is not as risky as an unsecured one. Thus, they often have low interest rates, making it the cheapest personal loan option in the market. Additionally, lenders are also quite flexible with their credit requirements, making this loan available even to people with a bad credit history.
Cosigned loans have two or more people guaranteeing to repay them. These loans could be both secured and unsecured, depending on the lender. A cosigned loan is an excellent option for people with no credit history or bad credit.
The lender may request that you look for someone to cosign a loan with you. The other party will be responsible for repaying the loan if you fail to pay.
The cosigner, in this case, will act as the insurance policy for your lender. A cosigned loan will have better loan terms and conditions, as having a cosigner might boost your probability of approval.
Unfortunately, this type of loan also has disadvantages. One of the cons is that it could hurt the other party’s credit history if you make late payments.
Taking a loan increases your repayment period and escalates your EMI. This is because of the extra interest you must pay for the loan. Banks often have higher interest percentages for personal loans.
Whether you’re taking a secured or unsecured personal loan, you may incur an interest rate of up to 24% based on the bank and your savings situation. However, not all banks have the same interest rate. To avoid paying high interest rates, it’s advisable only to take a loan when you need it.
You should also have a solid plan of how you will utilize the money and repay it. Do you have an income that can facilitate the monthly repayments of the loan? Ensure you also check your current level of debt.
Having multiple loans at the same time could hurt your financial health as it leaves a wrong impression on your finances. Lenders will think that you’re credit-hungry and increase your interest rates or deny your loan applications. Ensure you reduce your current outstanding loan principal before you apply for any new personal loans.
The length of a loan will be determined by the lender and the type of loan you choose. Loan length also plays an essential role in determining the total charges you pay. Different lenders have set up their loans in different ways. Thus, there are various loan lengths.
Remember to ask your lender about their loan lengths. Some loan products have an extra charge known as a prepayment penalty imposed on borrowers who prefer to pay back their loans early. Ensure you ask your lender about this fee if you intend on completing your loan earlier.
When you are approved for a loan, the lender will charge you a percentage of the loan as interest. The interest is considered the profit for the lender. Before settling for any loan, ensure you check the percentage interest charged by each lender before signing the contract.
If you prefer an unsecured loan, the lender is more likely to charge you a higher interest due to the lack of collateral and security. However, settling for a secured personal loan will reduce the interest rate as it will be less risky for the lender.
The overall loan expenses, including the interest rate, will be determined by your lender and the type of loan you choose. Depending on your lender, you could pay thousands of dollars more on your personal loan. Remember to ask potential lenders for their interest rates when looking for the right personal loan for your needs.
Your financial goal is one of the key factors to consider when thinking about applying for a personal loan. Why do you need a loan? Can you afford to pay back the loan based on your income and spending needs? How do you plan to pay for the loan?
Look at your spending and monthly budget to understand more about your finances. This will help you know how much money you can set aside to repay your personal loan, giving you a limit on how much you can borrow.
After getting a loan, your main priority will be repaying it as fast as possible. Check your finances to determine if you can make early payments. This will help you clear the debt before the loan term is over, reducing the amount you pay in interest.
When you’re looking around for the right lender, ensure you start by analyzing your current financial condition. You will need to look at your total monthly income and credit history to determine if you qualify for a personal loan. You will also need to collect proof of income, employment, and your bank statements.
All these documents will help you analyze your finances and know your debt-to-income ratio. Armed with this information, you can approach a reputable lender and apply for a personal loan. You should also consider collecting all the documents required to apply for the loan to make your application process more manageable.
Some lenders often have other charges on top of the interest rate. Some of these changes include origination or sign-up fee. Most of these fees are one-time charges, and you pay for them upfront. Your lender could subtract the origination fee from your loan.
Origination fees are used to cover the processing and administration costs associated with the personal loan application process. The fee often ranges from 0.5% to 1% of your total loan. However, some lenders may charge a flat rate.
When working with any company, customer service is the number one deciding factor. When working with a lender, ensure they have a high-quality customer service team. Ensure you do more research on potential lenders to determine the best one to work with.
Check whether the lender offers loan repayment flexibility, convenient banking, online access to your account, and assistance wherever you need it. Remember to read customer reviews on potential lenders’ websites and other third-party review sites. The good news is that the internet has more information, and clients constantly share their experiences on different platforms.
Thanks to the diversity in today’s lending industry, you should consider many options for loans. However, it might be quite challenging to settle on one lender. Thankfully, this guide will help you when picking a personal loan.
Remember to consider both your short-term and long-term financial goals before choosing a loan. You should get a personal loan only if you need it. Some personal loans may ultimately harm your financial health instead of helping you.
Check out other financial posts on our website for more informative tips.