Do you realise there are thousands of people taking personal loans for their purchases – may it be small or big ones? I bet you’re one of them, too.
Personal loans help millions of people all over the world meet any shortfall they experience whether it’s purchasing a house or a car, paying for college or medical bills, and much more.
But, if you are new to the credit world and are curious about loans, it’s a good start to understand the most common loan of all – personal loan. Let’s understand personal loans better.
What is a personal loan?
A personal loan is simply an unsecured loan that is available to anyone, as long as the person is eligible, through banks or a non-banking financial company, such as private lenders and credit unions, to meet their personal needs.
Since personal loans are unsecured, approval is based on certain criteria such as your income, credit history, employment history, capacity to make the repayments, among others. They are not tied on any of your personal assets like your home or vehicle or jewellery.
In the case of secured loans, the lender can seize your property or any asset you put up as collateral if for some reason you cannot make the repayments. Because there no guarantee to a personal loan, the interest rate is usually higher than those on secured loans. With personal loans, there is a greater perceived risk.
Conversely, remember that it is not good to default on a personal loan. Like any other type of loan, failure to repay or any default would reflect in your credit report. A bad credit can result in problems when you apply for other loans or credit cards in future.
The purpose of Personal Loans
You can use personal loans for just about anything you need. The lender will not monitor you on how you used the money.
You can spend it for remodelling your home, wedding expense, a family vacation, your kid’s education, latest gadgets or home appliances, unexpected medical expenses, or any other urgent expenditures.
You can also use a personal loan to invest in a business, pay bills, cover for car repairs, and much more.
How can I qualify?
The eligibility criteria varies from lender to lender. In general, to qualify for a personal loan, you must be at least 18 years old, have a stable job or income, you must be capable to repay the loan, and place of residence must be verifiable.
As with any type of loan, the most important requirement is a regular source of income. Whether you are a salaried individual, self-employed businessperson or a professional, your income is the basis for determining whether you can afford the loan or not.
Your employment history is as important, too. Lenders will see how long you have been employed. Most lenders require you to be at least employed for two years by your current employer.
Your credit history is also a crucial criterion. Lenders will look into how well you make repayments of your debts and loans in the past. Most lenders require you to have a good credit score for you to get a personal loan.
Other Features of a Personal Loan
The amount you can borrow with a personal loan ranges anywhere from £1,000 to £50,000 depending on the lender and your personal circumstances. In general, if you have a good credit rating and the higher your income, you’ll qualify for a much higher loan amount.
Personal loans are a one-time loan, not a revolving credit like credit cards. With credit cards, you get a certain amount and you can use as much as you can. Once you repay it, you can borrow the amount repeatedly. With a personal loan, your repayments reduce the balance but do not open up available credit that you can borrow again.
Once you pay off the full loan amount including the interest and fees, it’s the end of it. If you need to borrow again, you’ll have to go through the application process again.
Fixed Interest Rates
Interest rates can be either fixed or variable, and personal loans usually have fixed interest rates. This means it is locked on the agreed rate and it doesn’t change for the entire span of the loan.
The interest rates on personal loans depend on your credit rating. Low interest rates are reserved for those who have good credit scores. Lower interest rates simply means cheaper loans.
Variable interest changes periodically and there are some personal loans that come with this type of interest. With a variable interest rate, your payments can fluctuate as your rate changes. You may benefit if it goes down but pays more if it increases, making it harder for you to budget for your loan payments each month.
Fixed Loan Term
If you take out a personal loan, you will have a set period to repay it. Loan periods are usually stated in months. Longer loan terms lower your monthly loan repayment, but you will be paying more interest. You might be as well be aware that some loans charge a fee if you pay your loan early.
Personal loans affect your credit score.
Each time you apply or take out a loan, the lender reports your loan account details to the credit bureaus. Everything will be recorded. From applying for a loan, which means a new inquiry on your credit report, if you are accepted or rejected, to how promptly you make the repayments will affect your credit. If you want to maintain a good credit score, make your loan payments on time each month.
Lenders are all over the place, but watch out for scams. Watch out for lenders who’ll approve you right away without doing any credit check especially when you have a bad credit history. It’s a red flag.
Avoid any lender who asks you to send money especially via wire transfer or prepaid card to secure the loan. Read reviews about the lender and learn more about its reputation. Many fraud lenders are online. Make sure the lender you are working with is authorised.