Detailed Guide to Personal Loans from Prof. of Economy

A personal loan allows a borrower to take out the necessary amount of money from an online lender, a traditional bank or a credit union. Right after the moment a borrower received money, he begins to repay the loan on a scheduled basis until the loan is refunded fully. One of the main advantages of a personal loan is the fact that almost every personal loan lender offers fixed interest rates and terms. That is why this type of loan is so popular among American citizens.  If compared to other types of loans, personal loans come with a measure of predictability. Therefore, a borrower can easily plan his monthly budget without damaging it. Personal loan is a great opportunity to finance large purchases, from home repairs to buying a vacation.  The loan always comes with a lower interest rate than, for instance, paying with a credit card. Taking out a personal loan can also help to consolidate existing high-interest debts and lower the final APRs. A borrower doesn’t need to balance between many monthly payments at one time. Keep in mind that a personal loan, like any other type of online loans in the USA, has extra expenditures, adding in fees and interest rates. One should think twice before applying for a personal loan online and remember that loans influence credit score. Here’s what a potential borrower needs to know about personal loans and how they work.

What is a personal loan?

A sum of money borrowed from a traditional bank or other financial organization with a fixed payback period and specified monthly payments. Personal loan is an unsecured type of loans, implying no collateral. The available amounts of money start from around $1,000 to $50,000 or more. Interest rates usually very from 3 % to 36 %. An average repayment period is typically between 1 and 7 years. Personal loans provide single time payment of money to borrowers. A borrower, in his turn, has to refund the amount plus interest in scheduled parts over the period of validity, known as its term. Due to increasing popularity of P2P lending and online lenders, a lot of quick and easy loan options appeared. The majority of them take less than 10 minutes to apply for on the Internet. However, one business week can sometimes be necessary for the loan approval online process to be complete. It depends on how fast the lender receives and investigates your personal and financial information. Consider the fact that personal loans also imply other fees, such as an origination or administrative fee.  Pre-payment penalty can also be included if a borrower decides to repay the loan before the due-date. Some lenders find this fee obligatory, as they need to secure themselves from missing out future interest payments. Standard 2 year personal loan APR is 9.39%, according to the recent statistics. To compare with credit cards’ APR of 17.13 %, personal loans’ APR is quite affordable.

How to Apply for a Personal Loan Online

Application process is an unavoidable part of receiving any kind of loan. Before a borrower starts to apply online, it’s important to evaluate the credit score. It helps to understand what a lender will see when he analyzes a borrower’s credit situation. The process of checking credit report can’t damage credit history, so it can be run as many times as necessary. Since the review of the credit is complete, it is time to apply for a personal loan through any financial organization such as a bank or online lender. Every lender will check credit report and scores of a potential borrower. The credit score of an applicant is one of the most important determinants, which a lender considers when reviewing the application, and a higher score usually qualifies borrower for more preferable interest rates and loan terms on any kind of credit. Debt-to-income ratio (DTI) is the second factor which a lender will also likely look at. It shows the total amount a borrower owes every month compared to the total amount of earnings. To compute DTI, an applicant needs to know his monthly debt and divide by total monthly income. Lenders prefer DTIs under 36%, however, some of them approve borrowers with higher percentage.

How to Qualify for a Personal Loan

Different kinds of borrowers can apply for a personal loan, regardless of their credit score and history. However, there are some factors, which can be improved to increase chances of taking out a personal loan with the best rates and terms.

  • Income: the ability of a borrower to repay the loan at the proper time helps a lender to secure the loan from default. Your total monthly gainings will cover debt payments. A low income shows that a borrower will more likely violate an agreement to refund the loan on time.
  • Credit score: borrower’s credit score is a review of his total credit history. High scores give better chances of getting approved with lower interest rates. However, applicants with bad credit scores also have chances to get a personal loan. There are lenders who work with less reliable applicants. Higher interest rates are to be expected for this type of borrowers.
  • Credit report: credit report is designed to convince lender that there aren’t any unfavorable aspects from the past that may influence their approval decision. Overdue payments, bankruptcy and forfeiture become a bad sign and make it difficult for a borrower to get the necessary loan.

If a borrower doesn’t meet the requirements of a personal loan with good terms and rates, there is a possibility to improve the financial situation before applying for a personal loan.

When are Bad Credit Personal Loans a Good Idea?

Even if a borrower is free to use a personal loan as he wishes to, it doesn’t mean that applying for it is always a good idea. A borrower needs a strong reason for application. The best case when a personal loan is a reasonable solution is improving borrower’s financial situation or receiving funds for urgent expenses. Here are the examples:

  • Debt pooling: monthly payment personal loan with low rates can help a borrower to cover other high interest debts. This helps to save money. Even if it happens that no amount of money is saved, a personal loan provides a great possibility to structure due dates. This helps to stay motivated in paying off the debt.
  • Home renovations: if some home improvements were planned or sprang out at an awkward moment, a personal loan may be a better choice than any other type of lending, because it doesn’t require to be secured and there is no possibility to lose home if a borrower defaults on payments.
  • Extreme expenses: loosing a job, car breaks or a significant home reparation can be covered with the help of a personal loan. When there is a stressful moment, a personal loan becomes a life saver.
  • Private events: Weddings, divorce and funerals can be high-priced events. Not every American citizen can afford paying for it at once. A personal loan, in such cases, gives so much-needed funds at the right moment.

A personal loan must be the highest instance for paying off things like vacations and expensive consumer purchases.  It is better to save up, where possible, until you can pay for these expenses with cash or pay for them with a credit card.

Are there any Online Personal Loan Alternatives?

In case banks refuse you quick-cash financing, there are always other options to meet your emergency financial needs:

  1. Apply for an installment loan online. It will let you get up to $5,000 at competitive interest rates and convenient terms.
  2. If you need a small-dollar loan up to $1,000, Online Payday Loans will suit you perfectly.
  3. Credit card. It is cheaper if you can repay the card balance within 30 days till the interest starts to be charged.
  4. If you own a lien-free car title, use it to secure a Car Title Loan and get up to $10,000 instant cash same day.
  5. If you are a member of a credit union, consider borrowing form them.
  6. Ask your relatives or friends for help if it’s not too embarrassing and is not going to hurt your relationships.
  7. Make some extra cash with side gigs.
  8. Ask your employer for a payday advance.
  9. Apply to non-profit financial organizations for emergency relief assistance.
  10. Pawn some unnecessary items.

Online Personal Loan Questions Answered by Prof. Thomas Wright

How long do I have to wait to get a decision from a lender?

The process of approving for a personal loan takes literally few minutes. As soon as a borrower fills in the form, lender analyzes the provided information and gives a decision. However, some decisions take long time. Usually it depends on a borrower’s personal financial situation. Some online lenders offer a borrower to track the status of his application.

Will pre-payment penalty be charged for paying off early?

Most lenders set no pre-payment penalties. Therefore, a borrower is welcome to repay the loan at any moment or pay more than a fixed amount. Any on-top payment will cover all outstanding interest or fees first, and the rest will go to the principal part. It helps to reduce the total amount of interest a borrower is obliged to repay.

What is APR?

APR or annual percentage rate is a fee that a lender charges for taking out money. APR includes borrower’s interest rate plus any additional fees showing a whole picture of the total amount of the loan. Comparing different lenders’ APRs helps to analyze the accessibility and cost of different personal loan options.

What is pre-qualification?

The process of pre-qualification represents an estimation of provided information by a borrower. It helps lenders to understand applicant’s creditworthiness before giving out a personal loan. Sometimes pre-qualification is used as marketing tactic to engage new clients.

Can I repay the loan early?

Usually, borrowers are welcome to refinance the loan earlier. However, some lenders can charge pre-payment fees. While major part of personal loan lenders do not charge any fees for paying off the loan early, some may charge a pre-payment penalty if a loan is repaid ahead of schedule.

Why can I get rejected for a personal loan?

There are several reasons for rejection. Low credit score, unstable or no employment history, high DTI, low income, or simple absence of necessary personal and financial information can cause a rejection. It is important to prepare for an application thoroughly. Shop around several lenders and analyze their requirements. See whether your information is enough to qualify.

What is a good credit score?

First of all, there are different scoring models. However, credit score from 580 to 669 are generally considered fair. Scores from 670 to 739 are considered good; 740 to 799 are considered very good; and 800 and more are considered excellent.

Do personal loans hurt your credit?

Loans’ amount and their age can really damage credit history. However, a loan itself cannot hurt your financial situation. It is more important how you manage to refinance the loan fully and on time.

What are the basic requirements for obtaining a personal loan?

Requirements differ from lender to lender. A state where you live can also influence the required information, because the laws of each state regulate the terms individually. However, a potential borrower needs at least three things to be eligible for a loan, regardless of a lender and state:

  • The US citizenship
  • Legal age or older
  • Steady source of income

There are some other requirements, which are not obligatory. Some financial organizations can demand the information about your credit history, recent credit activities and credit audits registered to your name.

Do I need a collateral to qualify for a personal loan?

Personal loans online are considered to be unsecured type of loans. It means that no collateral is demanded from a borrower. However, if a loan is secured, a lender requires some monetary value to back the loan. Some savings in your bank account, car or home can be accepted as a collateral. In case when a borrower does not manage to refinance the loan on time, a collateral will be confiscated in order to compensate the loan and lender’s work.

Is it possible to use one personal loan to cover different financial costs?

It is possible to use a personal loan in many ways. Funds are usually transferred into your bank account as a lump sum. That is why it is for you to decide which needs to cover with a single personal loan.

What should I do if I can’t repay a personal loan on time?

First of all, you need to take action. Contact your lender in order to find a solution. A lender can offer you to change the due date or let you skip several payments. Of course, your credit history will suffer a bit, but it is the best way out of this trouble.

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