Most of us don’t have piles of cash stored under our mattress for major purchases like a car, home, college, or home renovations. We have to rely on getting a loan from a bank or other lender to get the money for these things. But how does one go about getting a loan? It isn’t too difficult.
If you are getting a loan for a car or a mortgage, it is easy to find places to get a secured loan. However, if you have a need a personal reasons like major dental work, paying off credit card debt, or any number of things, you will need to get a personal loan.
A personal loan is money borrowed from a bank, credit union, or online lender that you pay back in fixed monthly payments, typically over two to five years. Lender rates can range from 7% to 36% APR. Personal loans are usually considered an unsecured loan.
The good thing about a personal loan is you can use them on anything. We strongly suggest you only go into debt for necessary reasons. Conceivably, you can take out a personal loan to do whatever you want, whether it is to pay off a high interest credit card or go on a lavish once in a lifetime vacation. Once the bank releases it, it’s your money. Just remember you have to pay it back…with interest.
What does unsecured loan mean?
There are two types of personal loans, secured and unsecured. The difference between an unsecured and secured loan is that a secured loan is backed up by collateral, whereas an unsecured loan does not. Unsecured loans are more risky for the banks and usually have higher interest rates. Another difference is how it looks on your credit report. A healthy amount of secured debt looks good for lenders, whereas too much unsecured debt can lower your score.
Where can I get a personal loan from?
Depending on your credit and income, there are three main places to get a personal loan.
- Credit Unions
- Online Lenders
Each of these options have their pros and cons. Banks and Credit Unions are more traditional and tend to offer the lowest rates. However, there are usually more hoops to jump through and paperwork.
Online lenders are becoming a more viable and an easier option. With so many competing, there are many sites you can go to compare rates and terms.
Things to Look for When Getting a Loan
– Interest Rate
Always calculate the interest rate into the total amount of the loan you are getting based on the term of the loan. A $5,000 loan at 17% interest over a 5 year term comes to a total of $9250 you will be paying back the lender. Before you take out a loan, factor in the interest payments to make sure you are comfortable with paying that amount back.
– Fixed vs Variable Rates
Some lenders offer lower variable rates over a higher fixed rate. A fixed rate stays the same throughout the length of your loan. A variable rate changes with the market and can go higher, making your payments go up. It is good if you plan to pay off the loan quickly, but remember, the interest rates can skyrocket as time goes on. Make sure you check the terms of your loan very carefully before you sign.
Always check the fine print about fees, especially late fees and incidentals. Some lenders will charge a fee that they take out right away. For example, they will charge a $1000 fee for a $5000 loan and you end up with $4000 cash that you have to pay the full $5000 for.
– Loan Term
Your monthly payments may go down for a longer term loan versus a shorter term loan. However, you will end up paying more in interest. Figure out how much per month you can afford and pay more towards the balance each month to save on interest payments.
– Shady Lenders and PayDay Loans
While the best rates for personal loans are reserved for those with good credit, there are a number of predatory lenders out there willing to give desperate people a way out by offering loans with near criminal interest rates and fees. To avoid regulation, these companies offer “cash advances” at interest rates as much as 300%. This makes it almost impossible to get out of debt. If you are struggling to pay a bill and have nowhere to turn, try talking to the company to negotiate an extension or payment plan before resorting to these predatory lenders.
The best thing you can do if you need to go shopping for a personal loan is to check your credit and compare the best rates and terms to fit your life.