According to a recent study by Finder.com, 114.4 million Americans have taken out a personal loan in the past year. While those numbers may seem substantial at the outset, they are actually not too surprising given the current unemployment landscape amid the coronavirus crisis.
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A countless numbers of people are finding themselves in need of financial help and, if you’re one of them, a personal loan may just be the way to get quick, affordable access to the funds you need to stay afloat.
With that in mind, below is a comprehensive guide to personal loans. Read on to learn what these loans are, how they work, and what you need to consider before taking one out in your name.
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 and then you’ll be expected to make fixed, monthly payments on what you owe until the loan is paid off in full.
Notably, these loans can either be secured or unsecured, meaning that the lender may or may not 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
Compared to other types of financing, qualifying for a personal loan could be relatively easy. In order to approve you for a loan, your lender will simply verify your income history and credit score. In this case, the interest rate you’ll be given will be based on your creditworthiness, so the higher your credit score is, the better rate you should receive overall.
Since there’s only a few necessary approval requirements for personal loans, it’s often possible to receive the funds as soon as the next business day, Additionally, while the majority of personal loans range between $1,000-$,5,000, it is possible for those with excellent credit scores to be approved to borrow up to $100,000.
Benefits of a personal loan
In truth, if you’re in need of funds, there are many benefits to choosing a personal loan over other types of financing. For one, personal loans offer much lower interest rates than credit cards. In fact, the most recent data from the Federal Reserve Bank shows that while the average interest rate on a credit card is currently 14.5%, it’s only 9.5% on personal loans.
Additionally, personal loans offer the stability of fixed, monthly payments. Since you’re given a set amount of money in your lump-sum payment and personal loans come with fixed interest rates, you’ll have the stability of being able to budget your finances and to feel confident in knowing the amount you owe every month.
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 1%-8% 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.
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Making the final decision
Ultimately, the decision to get a personal loan is an individual one. However, for many people, personal loans can offer access to the money they 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 to make sure that you understand the terms and conditions to any loan before signing on the dotted line. Being informed is the first step to making the best financial decision for you.