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April 22, 2024 Uncategorized

Your Complete Guide To Personal Loans

  • What are Personal Loans?
  • What are the Different Types of Personal Loans?
  • What are the Benefits of a Personal Loan?
  • What are the Risks of a Personal Loan?
  • What Can I Use a Personal Loan for?

What is a Personal Loan?

Personal loans allow a person to borrow a lump sum of money to pay for personal expenses, like large medical bills, weddings, home improvement, and more.

Once you get a personal loan, you slowly repay the borrowed amount plus interest in a series of monthly payments lasting as long as what is defined in the loan terms, generally between 2 and 7 years.

What are the Different Types of Personal Loans?

There are a variety of types and uses for a personal loan. Understanding how they work will be vital to deciding which option is best for you and your financial situation.

Secured Loans

A secured personal loan is a loan that is secured by a financial or physical asset, like your car or a savings account. This asset is used as collateral for the money you borrow with the loan. Often, this will mean that you can get lower rates and faster approval as opposed to loans that do not have any collateral.

If you do not pay on your secured loan, the lender can put a lien on the collateral you used. If the loan eventually defaults, the lender can seize the collateral and sell it to cover their losses from the loan. It is essential to have the means to fund your personal loan so that you do not lose your car, savings, house, or whatever collateral you used to secure the loan.

Examples of secured loans are mortgages, home equity loans, HELOC’s, auto loans, and secured personal loans.

Unsecured Loans

While unsecured loans typically mean paying more interest, they also do not require you to put any of your assets at risk. No collateral is needed. You also need a good or excellent credit score for an unsecured personal loan.

Debt Consolidation Loan

Debt consolidation loans are used to consolidate a person’s debt, meaning they can pay it off faster and spend less on interest. It helps individuals by allowing them to pay one monthly payment instead of juggling many.

Co-signed and Joint Loans

Individuals who cannot qualify for a personal loan on their own can have a co-signer with good credit. A person can also get a joint loan and share the loan funds with another borrower to qualify for the loan. A co-signer or joint borrower will need excellent credit to strengthen your chances of getting loan approval.

Personal Line of Credit

A personal line of credit operates just like a credit card. Once you get a personal line of credit, you can access a pool of funds to borrow from when you need it. With a line of credit, you do not have to pay interest on a total loan amount but only on the amount you charge.

Typically, these are secured by a financial asset like a savings account, but some online banks or smaller lenders have unsecured options.

While there are other types of personal loans, these are the most common types you will encounter. Different banks and credit unions have different names and types of personal loans, so look into your options to find which is best for you.

What are the Benefits of Using a Personal Loan?

There are many types of personal loans and items to consider before acquiring one, but it is also important to understand why personal loans can be beneficial during times of need or financial crisis. Consider the following benefits of using a personal loan.

Spending Freedom

Personal loans give the borrower the unique freedom to spend the funds in any way they choose. Most lenders won’t need to see r

eceipts of how the money was spent. The borrower has complete discretion over the money.

No Collateral Needed

Most personal loans are unsecured. This means no collateral or valuable asset is backing up the loan. Other loans may put the borrower’s assets at risk of being repossessed if they default on the loan. In fact, a personal loan may be a better solution to funding a significant expense or life event than dipping into your emergency savings.

Quick Access to Funds

Applying for a personal loan tends to be a lot faster than applying for most other loans. If the borrower has a decent credit score and provides the required documentation, approval can happen quickly. Many applications can be quickly completed online.

What are the Risks of Using a Personal Loan?

There are some disadvantages to personal loans that borrowers should know before going ahead with an application.

Higher Interest Rates

Personal loans may have a higher interest rate than loans borrowed against an asset, like a home or a car. Run the numbers or meet with a financial advisor to be sure you can comfortably meet the monthly payments before finalizing a personal loan.

Potentially Lose Assets

If a personal loan goes into default, a lender may be required to place a lien on the borrower’s assets. While this only occurs in extreme cases, it’s essential to be aware of this possibility. On top of paying back the loan, the borrower could be stuck paying attorney fees, court costs, and delinquency fees.

Less Borrowing Power

The amount of money approved to borrow may be less than the sum you can borrow through other types of loans. The exact amount you can borrow will depend on your credit score and other financial qualifiers. As a general rule, determine how much you need to borrow before you decide to apply for a loan. Your financial institution may have a better option for you that you may not have considered.

What Can I Use a Personal Loan For?

No matter what you are looking to fund, you can access various personal loans to fund your adventure without having to dip into an emergency savings account. Let’s look into a few expenses you can cover with the use of a personal loan:

Fund a Wedding

While paying for a wedding with existing savings earmarked for the purpose is ideal—the world doesn’t always work that way. If there are costs to cover, a personal loan may make financial sense even for a smaller wedding.

The average wedding costs just over $30,000, which makes it too much for a single credit card, and the interest you’d pay would make it incredibly more expensive. Some wedding vendors offer financing, but you may find that a single personal loan nets you a better repayment plan or interest rate.

Using a personal loan, you may even be able to bring prices down by offering to pay more upfront. Caterers, tailors, and other small business owners are likely to appreciate the simplification of their cash flow. If they can pay their employees and purchase supplies without going into debt themselves, they may be willing to pass those savings on to you as well.

Fund an Adoption

Adopting a child can be one of the most rewarding experiences of your life, but it can also be costly. Several screenings and fees stand between you and a successful adoption. Realistically, costs could be as high as $50,000 to adopt a child in the U.S. today—even more, if you are adopting an infant from overseas.

Obtaining financing for this process can be very difficult. Since funding an adoption is not secured by an asset like a car or a home.

Fortunately, a personal loan can help you make things happen. With shorter-term-length options and fixed rates, you can make a plan to budget both for your adoption and your new child.

Cover Medical Expenses

Whether you’re considering an elective surgery, thinking about the cost of fertility treatments, or expecting other medical expenses—personal loans can be a financial tool for covering medical treatments.

Personal loans can be beneficial for covering treatments where the costs are known (at least in estimate) in advance. Because personal loans often have a fixed rate with various options for term lengths, you can choose the right option for your needs and make a clear plan to pay it off over time.

Even unexpected medical expenses could be a good candidate for a personal loan. If you have exhausted your other options like negotiating your bill, using a personal loan to cover remaining costs could keep you from going into collections and affecting your credit score.

If you own a home with some equity, a HELOC could also be a good choice, especially if you cannot predict the costs of potential treatments. Since a HELOC is a line of credit rather than a lump sum, you’ll have more flexibility to take out only what you need when you need it.

Cover Extra Education Expenses

Depending on your personal financial situation, your student loans may be insufficient to cover the full cost of your education. Sure, you can get loans to cover tuition, but books, supplies, computers, and other costs add up quickly. If you’re going back to school later in life, many traditional funding opportunities may not be open to you.

In these instances, taking out a personal loan to cover the extra costs of your education can be a lifesaver. Instead of paying for those costs out of pocket or with a credit card, you can pay for them upfront with a loan you can budget for going forward.