6 Things You Should Know About Personal Loans

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6 Things You Should Know About Personal Loans

If you've recently racked up a bunch of debt -- whether from a home improvement project, wedding, medical emergency or another cause -- you may be in need of cash. Personal loans could be one way to get the money you need. But before you sign your name on a loan agreement, here are some things you should know.

A personal loan is similar to other loans.

Like other loans, a personal loan is a lump sum of money that the borrower usually pays back in fixed installments over a predetermined period of time, typically ranging from one to five years. These loans ordinarily carry fixed interest rates, but not always.

There is more than one type of personal loan.

There are two types of personal loans: unsecured and secured. Unsecured loans are loans that aren't backed by assets. The lender does not have collateral it can seize if you default on your loan. As a result, unsecured loans generally come with higher interest rates to offset the additional risk incurred by the lender.

A secured loan, on the other hand, is a loan backed by an asset, known as collateral. In the event that you can't pay back your loan, the lender typically has the right to claim your asset as payment. Secured loans are fairly common. Mortgages, for example, are secured loans backed by the borrower's house, and auto loans are secured by the borrower's car. If you're looking to save money, a secured loan might be ideal. But you may want to make sure you can pay it off first, since you stand to lose whatever you put up as collateral if you default.

A personal loan may not be your best option.

While personal loan interest rates can be lower than credit card interest rates, this may not be the case if you have good credit. If you have an excellent score, you may be able to qualify for a credit card that charges zero percent interest for a year or even longer. However, if you have a credit score that needs work, personal loan interest rates may be higher than the interest on many credit cards. To ensure you save as much as you can on interest, consider exploring a bunch of different options before choosing a form of credit to apply for.

Banks aren't the only ones offering personal loans.

While the lending institution you belong to may offer you an attractive interest rate on your loan, it may not be giving you the best offer. Consider shopping around at several lending institutions to look for the most attractive deal. Credit unions are not-for-profit, which means they may be able to give you an even lower rate than your bank. And if you're in solid financial shape, peer-to-peer lending websites like Prosper and Lending Club might offer you some of the lowest rates out there.

You'll likely want to avoid some lenders if you can, like those offering payday loans. Loans from these lenders frequently come with exorbitant interest rates, and APRs can run as high as 300 percent.

Be wary of applying for too many loans.

When you apply for a loan, the lender will typically check your credit score. This check can result in a hard inquiry, which can lower your credit score by a few points. The more places you apply, the more your credit score could be dinged, which may make it harder to qualify for the best interest rates. To prevent this from happening, try asking lenders about possible rates on your loan before applying. While they may not be able to give you a hard figure, they could provide you with a range of rates, giving you an idea of what to expect from each lender.

Check for any hidden or additional fees.

Interest may not be the only cost associated with your loan. Some lenders charge origination fees--fees charged by the lender to cover the processing costs of a loan. At peer lending sites, for example, the origination fees can be as high as 4.5 percent of the total amount borrowed. For this reason, it may be wise to check the total amount repayable (TAR) in addition to the APR when deciding where to take out a loan. The TAR includes all the costs of a loan, from the first payment to the last.

Some loans may also come with prepayment penalties if you pay off your loan early. Before you take out your loan, you can look closely at the terms and conditions to see if this fee and others are included.

Bottom Line

Personal loans can be a reliable way to cover all sorts of expenses. Before you apply, consider checking your credit health to see if you qualify for the best rates. And remember to shop around; the most attractive deals may be with your local credit union or at peer-to-peer lending sites, not your bank.

About the Author: Drew Jaffe is a Communications Intern at Credit Karma. He currently attends Occidental College in Los Angeles, where you'll most likely find him cooped up in the media suite working on the latest issue of the school newspaper. When he's not working, he's most likely napping, eating burritos or hiking with friends.

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5 People Helped

Helpful to 5 out of 5 people

I just recently took a personal loan and it has helped significantly. Keep in mind that alot of ppl who are in credit card debt is due to.. well spending of course. The issue I see about opening a low interest or no interest for a year credit card would simply be one main reason. You have to have self control.. self dicipline to be able to accept that option. If you open a new credit card to pay off and transfer high interest balances make sure you are not spending what you pay off. I see many times where people will pay off a big chunk of credit card debt then turn around and respend it because they are living check to check. I was there once as well! With a personal loan you cannot reuse the money you are paying off the loan with. Scary for some.. yes .. but overall this will help build better spending habbits. The jump in credit score also opened up a few extra doors sooner than i has thought. Learn to manage money responsibly and learn that credit cards are no joke! I recently took all of mine and locked them up as well as my wifes. We are on a great path to success and are so close to reaching our goals. I know it can be done and I hope this helps someone out there trying to decide on what they wanna do!

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