What is a Personal Loan?
September 14, 2020
By Rahul Iyer
Whether you have an emergency, a major purchase to make, or you’re trying to consolidate your debt, a personal loan can be a great option. A personal loan is a type of loan where funds are borrowed from a bank, credit union or an internet-based financial institution with a fixed monthly payment. The average personal loan allows borrows to take 2 to 7 years to repay the loan. The rates that borrowers usually get when taking a personal loan ranges from as little as 6% to as much as 36% APR.
Uses of a Personal Loan
Another name for a personal loan is an unsecured loan. It is also referred to as a debt consolidation loan or a signature loan. This type of loan permits a wide range of uses. Most personal loans are not typically backed by collateral, hence the nomenclature, unsecured loans. There are cases where secured personal loans are offered. These are much cheaper than unsecured loans.
Regardless of which type of personal loan that you choose, you will find that most institutions are very lenient with what you do with the funds you borrow. Here are some of the uses of funds acquired via a personal loan can be used:
Home repairs and renovations
Repaying family or friends
Furniture or appliance purchases
Small business expenses
While this leniency is common, there are still some institutions that may have a lot of restrictions regarding the use of your personal loan. This is something that you must inquire about from the beginning of the process so that you do not waste your precious time.
Qualifying for a Personal Loan
Personal loans are available to most customers. Nonetheless, there are still some factors that will improve your chances of qualifying for such a loan at a desirable rate.
Your credit score: As you know, your credit score gives a picture of your financial integrity. A high credit score will make you eligible for the lowest rates. On the other hand, if you approach the bank with a low credit score, you may be faced with an unfavorable interest rate.
Your income level: The bank that you are considering applying to for a personal loan will evaluate your income level. They will also assess your debt-to-income ratio to determine your ability to repay the debt. A great debt-to-income ratio will make you much more eligible for the loan that you desire.
Your credit report: Your credit report will be inspected by your potential lending institution. While they will check your credit score, they will also go deeper to look at your credit report. This inspection is to check If there are any items that would affect your eligibility.
While it can be one of the easiest loans to secure, the viability of a personal loan is dependent on what you plan to do with the funds. Before accessing a personal loan, be sure to compare it with other financing options that you may be eligible for. This is necessary because while personal loans are less complicated to secure, they are often much more expensive than other options.