Brainy Loans
What is a Personal Loan?
A personal loan is when money is borrowed from a financial institution for personal needs agreeing to pay them back in monthly installments with an interest charge.
A personal loan is when you borrow money from a lender, bank, credit union or online bank. Personally agreeing to pay them back in monthly installments helps you make purchases, pay bills, take trips, and much more.
Typically loans are set up anywhere from 2 – 7 years helping you break down the high cost of something into smaller easily manageable amounts.
In a perfect world, it’s usually best to have savings or an emergency fund account you can tap into for unexpected expenses. But personal loans are a great option to pay off some high-interest debt or fix life’s unexpected mishaps.
How does a personal loan work?
Personal loans are a simple loan option that’s not backed by any collateral, so you’re personally liable for repaying the loan. Unlike other loans like cars, you’re financing an asset which usually means they will take that item if you don’t repay the loan.
Personal loans are evaluated differently so they primarily focus on the person who is borrowing the money and look at their credit score, credit history, debt-to-income, cash flow, and in some cases other personal information depending on what financial institution you’re using.
In most cases, many people get approved for a personal loan, but if you end up not qualifying, you may be offered options such as a secured loan. A secure loan is a loan on assets you currently own such as a house, car, and other financially valuable items.
Another great way to get a loan and not give up your possessions would be to get a co-signer. To put in other words a co-signer is a person who is willing to sign his name under your loan, which helps the bank eliminate the risk by spreading the responsibility of the loan onto two borrowers instead of one.
Usually, co-signers can range from family and friends who have either a higher credit score or a better income, which can help you get a better interest rate on your loan resulting in a lower monthly payment.
Most personal loans would be considered fixed-rate loans which means you have the same payment and same interest rate throughout the life of your loan.
But in some cases, financial institutions can offer variable-rate loans in which your rate and payment can change depending on how the economy is going.
How To Pick a Personal Loan
The best way to pick a personal loan would depend on your financial situation. For example, maybe you’re looking for the lowest payment, lowest interest, or even the shortest loan. There is quite a bit of variable that you need to consider when applying for a loan.
We believe the best way to determine what a good personal loan offer would be by evaluating the Annual Percentage Rate “APR”. What is APR you might ask, it’s the cost to borrow money including fees which are expressed as a percentage.
To give you an idea, if you get a $20,000 personal loan at 10.6% APR, With a 24-month repayment period at monthly installments of $928.45 you will end up paying $2,282.80 according to the payment calculator.
Lender rates can range quite a bit depending on the market situation, borrower’s information, and the lenders themselves. In most cases, the going rate for personal loans is anywhere from 6% APR to 36% APR. You can always compare the rates to make sure you are making a wise financial decision.
Does Getting A Personal Loan Affect Your Credit Score?
Yes, a personal loan will affect your credit score kind of like any other credit or loan application. But don’t worry on-time payments will build your credit score in addition to increasing your credit history. However, if you are late on your payment or don’t pay at all it can damage your credit score if it’s reported to credit bureaus
Applying for a personal loan will affect your credit score, in most cases, lenders will allow you to get a pre-approval with a soft pull that won’t hurt your credit score. But when you are approved lenders will do a hard pull which generally knocks off 5 points or less of your credit score depending on the lender.
What should or can you use your personal loan for?
Personal Loans are used for anything and don’t have any restrictions. The most common uses for personal loans are debt consolidation, home improvements, auto refinance, medical expenses, vehicle repairs, moving costs, vacations, weddings, and much more. The possibilities of a personal loan are endless.
As an example, if you’re driving in your car and your transmission goes out. In a perfect scenario, you have some money set aside for the repairs so you can get back to driving the car to work.
But in most cases with bills coming in every month and life getting expenses every day, it’s pretty challenging to have reserves in your savings. Well, that’s where personal loans will play a role by providing you with the necessary funds to get the car repaired and back on the road with a more manageable payment.
How do I Get a Personal Loan?
It’s pretty simple to get a personal loan. You just fill out an online application with a lender and in most cases get instant approval as fast as the next day.
The best way to increase your chances of getting approved with a low-interest rate would be by having fair credit, however, there are lenders that will offer loans for individuals that are rebuilding their credit or have bad credit.
Additionally, some lenders view alternative data to evaluate your application such as education, occupation, location, payment history, and more factors that can help them evaluate a prospect. This helps them give out more loans than traditional methods used by bigger lending institutions
Paying back your personal loan
Personal loans are just like any other loans or debts. You have to proceed with caution and make sure you are able to afford to pay back the loan. I usually suggest sitting down and creating a budget or a plan to make sure you’re not late on your monthly payments.
This could mean increasing the hours you work, changing your budget, cutting out unnecessary expenses, or simply just taking some money out of an interesting account. Loans are a powerful tool if used properly can help you live a stress-free life.
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