Every once in a while, life throws us a curveball – – an unexpected medical expense or loss of work that leaves us short on cash. When that happens, a personal loan may be needed to help provide us with the funds we need.
A personal loan is money that you borrow, usually from a bank, credit union, or other lender, that you repay in monthly installments. No collateral is needed for a personal loan, which makes it similar to a credit card – – it’s not tied to any property like your house or car. You can use a personal loan for any purpose. Some of the most common uses for a personal loan are to refinance existing debt at a lower rate, or to help make a large purchase when you don’t have enough funds.
Getting a personal loan may be a better option than using a credit card because the interest rates are frequently lower. The interest on a personal loan, known as the annual percentage rate (“APR”), specifies the rate of interest a borrower pays over the course of a year when repaying the loan. For example, if the APR is 10% on a loan of $1,000, a borrower can expect to pay $100 of interest per year. If you use a personal loan to consolidate your credit cards that have higher APRs, paying less in interest every month can allow you to pay off your debt faster.
The APR and the amount of money available to you through a personal loan are mostly determined by your credit rating. In general, the better your credit rating, the lower the APR you will be able to receive from a lender if you are approved for a loan. Even if your credit is not great or established, it may be to your advantage to get a personal loan to help build your credit history by making on-time, monthly payments.