Personal Loans: What Are They and How to Get One
Whether you’re looking to cover an unexpected medical expense, consolidate debt, pay for a wedding, or plan a much-needed vacation, there are many good reasons to consider taking out a loan. People often turn to their credit cards or family when they need a loan, but those options don’t work for everyone. Instead, you might want to consider a personal loan for your needs.
What is a personal loan?
First and foremost, a personal loan is a type of installment loan, which means that you’re given the money in a lump sum upfront and then you’re expected to make fixed, monthly payments on what you owe until the loan is paid off in full. These types of loans usually come from a bank, credit union, or other lender that you repay in fixed monthly installments.
Personal loans can either be secured or unsecured. If you apply for a secured personal loan, the lender may ask you to back the loan with a form of collateral like your home or a car. These days, however, it is much more common for personal loans to be unsecured.
How to qualify for a personal loan
1. Credit Score and History
Many lenders require applicants to have a minimum score of around 600 to qualify, but some lenders will lend to applicants without any credit history.
2. Income
The minimum income requirements vary by lender, with some lenders choosing not to disclose minimum income requirements at all. The requirements serve as a safeguard to ensure you’ll have the means to repay your loan.
3. Debt-to-Income Ratio
Your debt-to-income ratio (DTI) is expressed as a percentage and represents the amount in your gross income that goes toward your monthly debt service. Lenders utilize this percentage to project your abilities to make payments on new and current debt.
4. Collateral
As previously mentioned, the collateral you put up is dependent on if you apply for a secured or unsecured loan. At times, the collateral you’re asked to put up could be related to the underlying purpose of the loan. Conversely, secured personal loans may also collatorize other valuable assets such as investments, real estate, or collectibles.
Potential benefits of a personal loans
- Quick funding times
- Lower interest rates
- Flexibility and versatility
- Extended loan terms
- One lump sum
- Easier management
Important considerations before getting a personal loan
One thing to keep in mind before getting a personal loan is that, like any loan, this type of financing will come with closing costs. Closing costs are upfront fees that are charged in order to close on the loan. While these fees may vary, depending on the lender you chose, you can expect to spend between one and eight percent of the loan amount, on average.
The best way to account for these costs is to plan ahead for them. After you apply for the loan, your lender is required to give you a loan estimate, which will give you a line-item view of all the upfront costs. However, if you go into the process knowing that you will have to pay a few fees, you’ll be much better prepared to see the final figures.
Making the final decision
Ultimately, the decision to get a personal loan is an individual one. Personal loans could offer access to the money you need relatively quickly and at a lower interest rate than other financing options.
Always be sure to get a loan estimate from your lender and make sure that you understand the terms and conditions of the loan before signing on the dotted line. Being informed is the first step to making the right financial decision for you.
