5 Things To Know About Personal Loans
Why are personal loans appealing to so many? Personal loans offer low interest rates for consumers with good credit, and they’re generally smaller loan amounts than other types of loans. A personal loan may be the solution for you.
If you’re thinking about getting a personal loan, here are five things you should know about personal loans before you make your decision.
1. How do personal loans work?
Personal loans are a type of installment loan. That means you borrow a fixed amount of money and pay it back with interest in monthly payments over the life of the loan — which typically ranges from 12 to 84 months. Once you’ve paid your loan in full, your account is closed. If you need more money, you have to apply for a new loan.
It’s important to think about why you need the money and then choose the type of loan that’s most appropriate based on your current financial situation.
2. Types of personal loans
There are two types of personal loans — secured and unsecured.
- Unsecured personal loans aren’t backed by collateral. The lender decides whether you qualify based on your financial history. If you don’t qualify for an unsecured loan or want a lower interest rate, some lenders also offer secured loans.
- Secured personal loans are backed by collateral, such as a savings account or CD. If you’re unable to make your payments, your lender typically has the right to claim your asset as payment for the loan.
3. Where you can get a personal loan
Banks are probably one of the first places that come to mind when you think of where to get a loan. But they’re not the only type of financial institution that offers personal loans.
Credit unions, consumer finance companies, online lenders and peer-to-peer lenders also offer loans to people who qualify.
Quick tip: Many internet lenders have emerged in recent years. If you’re not sure whether a lender is legitimate, consider checking with the Consumer Financial Protection Bureau or Better Business Bureau.
4. Impact on your credit scores
When you apply for a loan, the lender will pull your credit as part of the application process. This is known as a hard inquiry and will usually lower your credit scores by a few points.
Generally speaking, hard inquires stay on your credit reports for about two years.
When you’re shopping around for the best rates, some lenders that you already have an account with will review your credit. This is known as a soft inquiry and doesn’t affect your credit scores.
Consider checking your rates with lenders that will do soft pulls, which won’t impact your scores.
5. Interest rates and other fees
Interest rates and fees can make a big difference in how much you pay over the life of a loan, and they vary widely from lender to lender. Here are some things to consider.
- Interest rates: Rates typically range from around 5% to 36%, depending on the lender and your credit. In general, the better your credit, the lower your interest rate will be. And the longer your loan term, the more interest you’re likely to pay.
- Origination fees: Some lenders charge a fee to cover the cost of processing the loan. Origination fees typically range from 1% to 6% of the loan amount.
- Prepayment penalties: Some lenders charge a fee if you pay off your loan early because early repayment means that the lenders are missing out on some of the interest that they would have otherwise earned.
Before signing on the dotted line, consider adding up all the costs associated with the loan, not just the interest rate, to determine the total amount of money you’ll be responsible for repaying.