A personal loan is one of the most common products offered by banks. Here is everything you need to know about them.
Personal loans provide lower interest rates than credit cards and can be used to finance almost anything. As a result, it’s not unexpected to see people looking for information on what a personal loan is and what personal loan interest rates are.
A line of credit is available with personal loans. Unlike a credit card, a personal loan allows borrowers to make a single cash payment. Borrowers then pay back that extra amount of interest and the personal loan amount in monthly installments throughout the remainder of the loan’s term.
Thanks to peer-to-peer loans and internet lenders, there are a plethora of quick and easy borrowing options. The majority of these procedures may be completed in under 10 minutes using the internet.
However, based on how quickly the lender gets and evaluates your paperwork, the entire approval procedure could take up to one week.
There are hundreds of quick, easy loan choices available thanks to the advent of peer-to-peer and online lenders, and most take less than 10 minutes to apply for a personal loan on the internet.
However, depending on how quickly the lender gets and processes your paperwork, the whole approval procedure for a personal loan can take up to one business week (more on that below).
Personal loans, at the very least, charge interest.
Other fees may apply, such as origination or administrative charge deducted from your loan amount once you’ve been authorized, or an early payoff penalty if you pay off your loan before the end of the term (making the lender miss out on future interest payments).
According to the most recent data from the Federal Reserve, the average APR on a 24-month personal loan is 9.39 percent. In comparison, the current average annual percentage rate (APR) for credit cards is 17.13 percent.
How do personal loans work?
Unless the loan specifies how the funds must be used, personal loans allow you to borrow money for almost anything you want. These are installment loans, which means you make a single payment over the term. Unlike credit cards, a personal loan only allows you to receive funds once, which is when you apply for the loan.
Personal loans, on the other hand, usually have fixed interest rates. The loan payment should remain the same for the duration of the loan. The advantage is that when the loan term is up, the loan is paid in full.
However, you don’t have the option of paying a lower minimum payment. You must make your monthly loan payment in full or you will be in default.
Personal loans exist in a variety of shapes and sizes, and they can be secured or unsecured. With a secured personal loan, you must provide collateral or an asset that is worth something if you are unable to repay the loan. If you default, the lender takes possession of the asset. Secured debt includes things like mortgages and auto loans.
You don’t have to put up any collateral with an unsecured personal loan, which is the most frequent sort of personal loan. If you do not repay the loan, the lender will not be able to seize any of your possessions.
That isn’t to suggest there aren’t consequences. If you default on an unsecured personal loan, your credit score will suffer, which will increase the cost of borrowing, often considerably.
In addition, the lender has the right to launch a lawsuit against you to recover the unpaid amount, interest, and fees.
Unsecured personal loans are typically used to finance a big purchase (such as a wedding or vacation), to pay down high-interest credit card debt, or to consolidate students loans.
Personal loans can offer benefits over other types of loans. Below are a few advantages of using this type of financing over other options.
Some types of loans can only be used for a certain purpose. For example, if you take out a car loan, the only way to use the funds is to purchase a vehicle. Personal loans can be used for many purposes, from consolidating debt to paying off medical bills.
If you want to finance a major purchase but don’t want to be locked into how you use the money, a personal loan can be a good alternative. Check with your lender on the approved uses for the loan before applying.
The interest rates for personal loans are frequently cheaper than those on credit cards. The average personal loan rate was 10.46 percent in September 2021, while the average credit card rate was 16.27 percent. Personal loans with rates ranging from 6% to 8% are available to consumers with outstanding credit histories.
You may potentially be eligible for a loan amount more than your credit card limit. Don’t worry if you have a terrible credit score; we have a solution for you below.
No collateral requirement
Unsecured personal loans don’t require collateral for you to get approved for applying for a personal loan. This means you don’t have to put your car, home, or another asset up as a guarantee that you’ll repay the funds. If you’re unable to repay the loan based on the agreed-upon terms with your lender, you’ll face significant financial consequences. However, you don’t have to worry about losing a home or a car as a direct result.
Consolidating debt, such as many credit card accounts, is one reason why some people take out personal loans. A single fixed-rate monthly payment on a personal loan is easier to manage than many credit cards with varying interest rates, payment due dates, and other variables.
Borrowers who qualify for a personal loan with a lower interest rate than their credit cards will be able to simplify their monthly payments while saving money.
Personal loans can be a good option for some, but they are not the right choice in all situations. Here are a few negatives to consider before taking out a personal loan.
Personal loans do not necessarily have the lowest interest rates. This is especially true for borrowers with bad credit, who may be subjected to greater interest rates than those charged by credit cards.
If you have enough equity in your home, you can take out a home equity loan or a home equity line of credit to borrow against it (HELOC). A home equity loan is a type of installment loan, but a home equity line of credit (HELOC) is akin to a credit card. The fact that your home is utilized as security for a home equity loan or a HELOC is one disadvantage. You risk losing your home to foreclosure if you default on the loan.
Credit card balance transfer offers are another alternative to personal loans. You can save money with a good balance transfer offer, provided you pay the balance off before the special offer period ends. Our credit card experts will help you see how long it will take to pay off your balance.
Personal loans may be accompanied by fees and penalties, which can increase the cost of borrowing. Some loans have origination fees ranging from 1% to 6% of the loan amount. Fees for loan processing might be rolled into the loan or deducted from the total amount disbursed to the borrower.
If you pay off your loan debt before the end of the term, some lenders will charge you a prepayment penalty. Examine all costs and penalties associated with any personal loans you’re considering before applying.
Credit cards come with small minimum monthly payments and no deadline for paying your balance off in full. Personal loans require a higher fixed monthly payment and have to be paid off by the end of the loan term.
If you consolidate credit card debt into a personal loan, you’ll have to adjust to the higher payments and the loan payoff timeline or risk defaulting.
Personal loans can be used to consolidate debt, such as credit card balances, but they don’t solve the problem. Your available credit limit is increased when you pay off your credit cards with a personal loan. This provides an opportunity for over spenders to rack up extra charges rather than pay off their debt.
Personal loans are an attractive option if you need quick cash. Here’s how to discern whether a personal loan might make sense for your situation:
However, personal loans are not a good idea for everyone. After all, personal loans are still a form of debt. Below are a few reasons a personal loan might not be right for you:
Develop a strategic plan for how you’ll use the money and how you’ll repay it before taking out a personal loan (with interest). Consider the benefits and drawbacks of a personal loan vs another type of funding. Consider a home equity loan, a HELOC, or a credit card balance transfer as options. Contact SoniMoney for assistance in determining the best loan choice for you.
Get quotations from different lenders to compare interest rates and loan terms if you’re considering a personal loan. Remember to read the fine print, which may include fees and penalties. After you’ve gathered all of the information, consider if the advantages of a personal loan exceed the disadvantages before committing.
