Personal loans are a great way to access the money you need quickly. The application process is simple. You will generally need to verify employment, income, and residence.
The lender will pull a credit check. You will likely still qualify for a personal loan if you have bad credit or no established credit. However, be prepared to pay a higher interest rate and have some type of collateral to offer.
The most common use of a personal loan is to consolidate other debts. This is a great way to have one monthly payment and reduce your monthly expenses. However, this scenario only works if you are willing to set a budget and life within the boundaries of it.
In this article, we will discuss what personal loan means, the various types of personal loans, the uses and how to eliminate debt of personal loans. Without further ado, let’s jump right in.
What is a Personal Loan?
A personal loan is money you borrow from a lender for your own private use. The lending institution can be a bank, investment broker, or private lending company. You can apply for such a loan in your home town or on the internet.
Personal loans can be used for a variety of needs including a vacation, vehicle repairs, education, medical expenses, home repairs or remodeling, legal bills, and debt consolidation.
The average personal loan maximum is $15,000. The amount you are eligible for will depend on the lending institutions guidelines for such loans, your income, and your overall credit rating. A personal loan is often confused with a line of credit.
The major difference between the two is that a personal loan is a lump sum amount of money issued to you by the lender. A line of credit is similar, but you have access to funds up to your credit line that you can access all at once or just what you need, when you need it.
Personal loans can be either secured or unsecured. Secured loans mean you will offer the lender some type of collateral that they can claim in the event you don’t repay the loan. This can be a vehicle, land, or other asset you own. Unsecured personal loans mean there is no collateral. The interest rates for unsecured loans are higher because there is a greater risk of non-payment.
Terms of Personal Loans
The terms of a personal loan are generally one to five years. The terms of your loan will depend on the lender and the amount of money you borrow. It is important that you understand the loan terms prior to accepting the funds.
While a longer loan term will result in lower payments, you will end up paying more for the loan over the life of it due to the amount of interest. Keeping that in mind, only borrow the amount you need for your specific purpose and pay it back as quickly as you can.
Make sure the set monthly payment is something within your reach on a regular basis so you are not likely to default on the loan.
Types of Personal Loans
Personal loans are easy to obtain for most individuals. Even those individuals with poor credit or who haven’t established a credit rating can generally get one. You will need to verify income, employment, and residence when you apply.
Personal loans are a fast and convenient way to get the money you need for a variety of needs. The funds can be used for essentials, travel, education, or to pay other loans. The choice is yours.
There are two types of personal loans, secured and unsecured. It can be hard to decide which one is best for you. Secured loans come with a lower interest rate than unsecured loans.
However to get that lower interest rate you will have to offer some type of asset to the lender in the event you are not able to repay your loan. In many cases, the one you will choose will depend on what you are eligible for.
Unsecured loans are generally available to those who have a good or outstanding credit rating and a steady income. Secured loans are usually the only option for those with poor credit, no credit history, and an unsteady work history.
1. Secured Personal Loans
Secured personal loans are a great way to establish your credit. Their payments are often low, but your interest may be off the charts. To offset this, use it to your advantage. Only borrow what you need. Too often applicants hear the dollar amount they are eligible for and run with it.
Know before you apply what amount you are looking for as well as what you plan to use it for. Then stick to that. Don’t let a high pressure lender talk you into taking more than you really need. If this personal loan is your opportunity to establish your credit history, then don’t blow it. Use it wisely.
Make all your monthly payments on time. If possible pay the loan off sooner to show you are responsible. Doing so will make the process much easier the next time you need to apply for a loan. Secured loans can also be a second chance for those with poor credit to redeem themselves.
Key Notes on Secured Personal Loans
- It is important that you don’t miss any payments with a secured loan. If you find you can’t make a payment for some reason, contact the lender immediately to work out a solution.
- This is very important if you have lost your source of income. Most lenders will try to resolve the issue before reporting the personal loan as being in default. Since you have secured the loan with some type of property you own, you are at risk of losing that item if you can’t repay the loan.
- It is in your best interest to find a solution to stay on track with the payments of a secured personal loan.
2. Unsecured Personal Loans
Unsecured personal loans have a higher interest rate, but you will have the peace of mind that nothing you own is tied to that loan if you default on it. However, it is still very important for you to take responsibility for the debt and pay it as outlined in your loan terms.
The same rules apply here as with a secured loan. Only borrow what you need and pay it back early if possible to keep your credit score high and reduce the amount of interest you will pay on the loan.
Key Notes on Unsecured Personal Loans
- Personal loans are a great resource for those who need money fast for a variety of reasons. It is important to consider the obligations of both secured and unsecured personal loans before committing to one.
- Most lenders are glad to take the time to explain which one will work best for your needs and why. Make sure to ask questions if you don’t fully understand the process for a personal loan.
- Do your best to make your payments on time or ahead of schedule. Your credit is a serious matter that you should always work hard to maintain.
Uses of Personal Loans
Personal loans can be used for most any purpose you would spend money on, the choice is yours. The most common use for personal loans is to consolidate debt that has accumulated, such as credit card debt.
Individuals may find themselves scraping by each month with minimum payments, realizing the debt is going to take forever to pay off this way, as well as cost a fortune in interest. Below are some of the uses of personal loans.
1. Helps in reducing Cash Flow
To help loosen up some cash flow each month as well as pay off the debt in less time, personal loans can offer a great solution. Start by determining the amount of money needed to pay off each credit card and other debt you want to include.
Make sure the interest rate on the personal loan will be less than the average of your credit cards and other debt. It is also important to look at the monthly payment and how long it will take you to pay off your debt this way. It is generally less than paying minimum balances on a credit card.
2. Financial Relief on Medical Bills
Unexpected medical bills can take a toll on any household. Those who don’t have any type of health insurance because they couldn’t afford it may feel the crunch the most.
I call this class of people the working poor, as they work for all they have, yet barely get by. In addition, they are told they earn too much money to be eligible for public assistance or medical assistance.
A personal loan can offer you financial relief regarding medical bills, especially if they are threatening to take you to court or garnish your wages. Since personal loans generally have a maximum loan amount of $15,000 this will only benefit you if the medical bills are under that amount.
3. Personal Loans Provide Opportunities
Most of us at one time or another have experienced getting behind on a bill or two. This is the result of many things including changing jobs, layoffs, and unexpected expenses. Personal loans can provide you with the opportunity to get caught up on your bills and start living within a budget again.
4. Helps in repairing your vehicle quickly
As a society that is always on the go, having your vehicle break down can really put a wrench in things. Most families in our society are living paycheck to paycheck, so there are no funds put aside to cover the cost of such repairs. A personal loan can help take care of getting your vehicle repaired and back on the road for you very quickly.
5. Help in Travelling Expenses
Some individuals choose to use a personal loan to take a trip they have always wanted or a family vacation. Out of town weddings and family reunions are important to people, so this type of loan can assist with getting the funds you need to allow you the opportunity for such travels.
There is debate over if this type of use for a personal loan is justified or indulging. However, I take the view that life has to have a balance. You have to include some relaxation and fun in your life for such travel experiences. Children are only young once, so if a personal loan makes that trip to Disney World possible for all of you to enjoy, then I say go for it.
6. Educational Expenses
Education can be expensive, yet is often necessary. Personal loans are becoming more common for educational expenses because student loans aren’t available for all types of classes, and courses. Since taking such educational classes can promote your career, this could be a good investment on your part.
Relocating for personal reasons or professional ones can be expensive. Especially if you will have to cover all the cost out of pocket. A personal loan can help you cover deposits, travel arrangements, and rental trucks to make such relocation possible.
Personal loans are available to offer funds for a variety of sources to individuals. It is important to completely understand the terms of personal loans and to use them wisely. However, they serve a much needed purpose for many of us in society.
How To Eliminate Debt with Personal Loans
There are many ways to allocate the funds you receive under the terms of a personal loan. One of the most popular uses for such loans is to eliminate debt.
Personal loans offer a great alternative for individuals who are struggling to make monthly payments on too many accounts. The idea is to pay off such debt with a personal loan, then only have one monthly payment to make.
The monthly payment is often much less than you were paying before on all your outstanding debts. Having only one loan payment can also improve your credit score. This is especially true if the other debt was mainly credit card debt with the balance being very close to the credit limit.
1. List all your outstanding debt
The first step is to make a list of all of your outstanding debt. Make columns for information including the creditor, the balance due, and the interest rate. In the last column calculate the total amount you will pay on that debt making your current payments.
There are great calculators to get this information online. These calculators are free and easy to use. To do this, simply type in the balance, interest rate, and monthly payment. In many cases you will be shocked to see how much that debt is going to end up costing you.
2. Know Your Total Debt
Once you have completed that task, add up the totals in each column. You will need to know the balance due to pay off the debt as this is the amount you will need your personal loan to be for.
You also want to remember that overall cost total. It is very important that before you agree to the terms of a personal loan that you have made sure the overall cost of that loan will be considerably less than if you continue to make minimum payments on the debt you already have.
If the cost is fairly close or more, than don’t take out the personal loan. It will do more damage to your current situation than good.
3. Choose a Good Minimum Monthly Payment
Find out what the monthly payment will be as well. Imagine your shock if it ends up being more than what you are currently paying out.
This is a good time to take a realistic look at the reason why you have debt that you are having a hard time meeting the monthly payments for. It may be due to a change in circumstances that you had no control over. However, if the reason is that you have poor spending habits then you need to address this issue before taking out a personal loan.
Nothing is more upsetting than getting a personal loan to cover your debt, then realize six months down the road that you have ran up a large amount of debt again. The situation with be much more grim now because in addition to paying off that debt you also have a personal loan payment to cover each month.
4. Enroll in a Debt Management Course
Enrolling in a debt management course or budgeting class can help you identify areas where you are not using your income wisely. There are also many excellent online resources to assist you.
A good exercise is to have every family member write down all the money they spend over a week’s time. You will be amazed to see the pattern of things that are draining your wallet during this exercise, including that daily cup of coffee and eating on the run.
This is a great way to get all family members involved in the budgeting process as well as involved in finding better ways to manage money.
Too often, a person who gets a personal loan to consolidate their debt racks up huge debt again quickly. Then they not only have that debt to pay again, but now they have a personal loan payment to meet each month as well.
Personal loans can be a great way to eliminate other types of debt if used correctly. It is your responsibility to do your homework first. Make sure taking out a personal loan to cover your other debt is going to offer you a solution, not result in more financial stress.
It is wise to enroll in a debt management course if you feel you may be at risk to continue the cycle of accumulating more debt. These can be taken for free at many non-profit credit counseling centers around the Nation.
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