Largely depending on their credit scores, most banks and P2P (peer-to-peer) lenders give out personal loans of between $3,000 and $50,000. A few people borrow money for vacations and other luxuries. But most people take out personal loans to pay off high-interest debt, such as credit cards, finance home repairs, or for any other financial crisis.
A personal loan is also ideal for many people because the application process is relatively straightforward. Actually, most of the application involves asking yourself some questions about what type of loan is best for your purposes and your family’s needs.
What Is a Personal Loan?
Credit card applications are often not much more complicated than a mouse click. But, their interest rates are very high. Auto and mortgage loans usually have low rates, but the application process is cumbersome to say the least. A personal loan is a good balance between both. The interest rate is much lower than other types of consumer loans, and the application is not too complicated.
Moreover, personal loans are not revolving debt. Once the loan is paid, the agreement terminates.
Types of Personal Loans
Also unlike credit cards, payday loans, and other types of consumer loans, personal loans offer some flexibility. The two main options are:
- Secured Loans: People with lower credit scores might look at secured personal loans. Instead of property like a house or car, the collateral for a personal loan is usually a CD or a savings account. If the borrower defaults on loan payments, the lender has the right to take the collateral.
- Unsecured Loans: For this type of personal loan, the lender decides whether you qualify based on your credit history. Your credit score usually also controls the amount of money you can, and should, borrow.
To decide which type is best for you, it’s best to first do your homework about the loan and then review options with different lenders.
Where Should I Go?
Most banks and credit unions offer personal loans. Generally, a bank will work with pretty much anyone, and a credit union only works with members. Because of this exclusivity, credit union interest rates may be a little lower than bank rates.
Alternative lenders include the aforementioned P2P lenders, such as Lending Club, SoFi, and Lending Tree. Plus, new startups appear almost every day. Many P2P startups offer very good introductory deals. To determine if the source is legitimate, go to a resource like the Better Business Bureau or the Consumer Financial Protection Bureau.
How Much Will The Loan Cost?
Personal loan interest rates vary significantly among different lenders and different types of loans. Here are a few general considerations:
- Interest Rate: Typically, the interest rate is between 15 and 25 percent. Once again, your credit score usually determines your interest rate. Also bear in mind that the longer the repayment term, the more interest you’ll pay.
- Origination Fees: The origination fee is basically the application fee. Some lenders charge between 1 and 6 percent of the loan amount to set up the account and fund the loan. Some lenders do not charge such fees.
- Prepayment Penalty: Most lenders charge these penalties. If the borrower pays off the loan early, the lender misses out on interest rate income.
A personal loan may be the answer to your financial crisis, so apply for one today.