There are many different types of loans available today. Whether it is a home loan, also known as a mortgage, or an auto loan in which the purchased item serves as collateral, or a personal loan, there are similarities and differences between them all. They are also different in their purposes. After reading this article you should understand the basics of a personal loan, how they work, the application process, and factors lenders consider when extending credit for personal loans.
What is a Personal Loan?
Unlike a home mortgage loan or an auto loan in which the item you’re buying serves as collateral for the loan, personal loans may or may not require collateral (depending on the lender and the strength of your credit). Most personal loans do require repayment of the loan amount plus interest. Many of them have fees associated with the loan as well.
Fees, interest rates, duration of the repayment term, etc. vary greatly from one lender to the next. While personal loans may be obtained for practically any need, there are some lenders that restrict how these loans are utilized. That may be a good thing, as there are often other types of loans, such as student loans, mortgage loans, etc. that are better suited for specific purchases and serve your financial interests more effectively.
Unless there are specific exclusions, you can use your personal loan for practically anything. Some consumers seek a personal loan for debt consolidation, a loan to pay off debt, a personal loan for credit card debt (that allows them to pay off their credit cards at much lower interest rates), loans to repay medical bills, loans to fund a dream vacation, and more. The only limitations on how you use the money are those established by the lender.
How Do Personal Loans Work?
Unlike credit cards or personal lines of credit, a personal loan is for a specific amount and given in a lump sum payment. It has a fixed start and end date along with a set interest rate. Personal lines of credit are different in that they operate more like a credit card, where you have a specific amount of credit available to you and the credit you use is deducted from that amount. The great thing about personal loans is that you know what your monthly payments will be, how long they will last, and when your loan will be repaid in full.
If your lender requires collateral to secure the loan, you have many options available to you, including things like:
- Boats and personal watercraft
- Certificates of deposit
- Recreational vehicles
- Hunting cabinets
Essentially any physical or financial assets you have may be acceptable to some lenders as collateral to secure your loan. However, if your lender offers the option of an unsecured loan, you need to be aware that these represent greater risks for the lender and often result in higher interest rates for you.
How to Apply for a Personal Loan
The internet and the wide proliferation of secured banking apps, as well as specialized online lenders, and credit unions have made it easier than ever to apply for a personal loan online.
Because lenders want to lend money, the application process is fairly straightforward for borrowers. The lender will ask various questions, you may need to provide proof of income along with other supporting documentation. Be prepared by checking your credit score before you apply for a personal loan, so there are no unpleasant surprises you didn’t know about. The other thing to consider when it comes to how to get a loan is the lender itself. Do a little research and make sure the organization has a solid reputation before applying for a debt relief loan or any other type of loan.
Factors Creditors Use to Determine Loan Eligibility
Lenders use a variety of factors when determining your eligibility for a personal loan. Each lender has its own algorithms or formulas for determining both your eligibility in general and the difference between secured and unsecured personal loans. Among the factors used, are the following:
- Your credit score. This is a huge determining factor so make sure your credit score is ready for the challenge.
- Your debt-to-income ratio. This is the amount of debt you have compared to your current monthly income. Lenders prefer this number to be 36 percent or less, though other factors will swing the vote in your favor if they are significantly high.
- Your credit utilization. This is the amount of credit you have available compared to the amount of credit you’re currently utilizing. Lenders like to see this number below 30 percent, and it can have a hefty impact on your approval odds.
- Hard inquiry history. While this isn’t a significant factor in general, especially if you’re shopping around for better rates and terms, lenders may see it as a red flag if you’ve applied for multiple loans, credit cards, etc. in a short amount of time.
By now, you should have all the juicy details on how to get a loan for your personal needs. Feel free to contact us if you have any questions about the loan process or if you need a personal loan.