There are several alternatives available to those who find themselves short on money or believe that they will not be able to cover certain expenses due to their limited budget.
One of the options that people use the most to get out of these situations is to take out a personal loan. They might take out a loan with a bank, a credit union or a trusted money lender.
Eligible loan applicants may have a lot of freedom in terms of the choice they have to apply for a loan. Moreover, those who obtain a loan should learn the proper ways to utilize these funds to their advantage. They should go into the process with a plan and follow it thoroughly to avoid paying too much for taking out a loan. Personal loan applicants can learn more about the basics of personal loans to be better prepared to apply by reading the article below.
Understanding Personal Loans
Potential personal loan applicants should acquire funds from a lending institution to pay for expenses like specific goods or services. This type of loan is convenient and quick to use. However, it may not be easy to qualify for a personal loan. These loans tend to have a high risk for lenders, and low risk from the consumer. Therefore, not everyone that applies for a personal loan gets approved for funds by the lending institution.
Personal loans also offer applicants great flexibility, so once an applicant files for funds there is a chance that they do not qualify for them. Qualifying applicants may use their funds to settle single sources of debt ranging from house renovations to medical expenses. Lenders may ask the applicant what they plan to use the funds for, but in general, personal loans are the most flexible loans of the market.
How are personal loans different from other types of loans?
Some of the unique characteristics of personal loans set them apart from other types. For starters, personal loans offer a degree of flexibility unique to them. Loan applicants should understand the difference between personal loans and other types to check the type of loan that is best suited for them. Applicants should consider the following characteristics of personal loans:
- Unsecured: This loan feature is advantageous as it does not require that an applicant sets any type of collateral to obtain funds. For instance, an applicant will not have to establish their personal property, such as their house, as a collateral. This safeguards their property from forfeiture if they fail to pay off their debt.
- Fixed: This refers to fixed interest rates that most personal loans have. By having a fixed interest rate, applicants will keep paying the same rate every month for the duration of the loan. An applicant’s credit score will determine how much APR his or her loan will require him or her to pay. Personal loan amounts are also fixed, and applicants may be limited to apply for a fixed amount of funds at a time. These terms may apply to any applicant, even those who have great income, credit score or history. On the other hand, some loans may have variable APRs that will fluctuate depending on many factors. Before applying, candidates should consider which type of loan they will be able to benefit the most from.
- Convenient: Personal loans are a great alternative for individuals who have acquired great amounts of debts from different sources. They should consider applying for a personal loan as it helps them settle these debts. Personal loans offer their applicants having a single and convenient source of debt. Moreover, the APR for the loan tends to be fixed and therefore lower that the APRs from other sources of debt. Personal loans also offer customizable features that applicants can take advantage from to accommodate their need and pay their debt more effectively.
Risks of Taking a Personal Loan
There is a certain risk that personal loan recipients may misuse the loan’s funds or misunderstand its terms. Despite its many benefits, personal loans have terms that the loan beneficiaries must follow. By doing so, they can prevent dealing with a collection agency or suffer from legal actions that the lending institutions might take against them. Consumers can pay debts like credit cards for an indefinite amount of time as they are using them. But this is not the case for personal loans. The funds that applicants obtain from personal loans must be paid off at a set period of time. When applying, the consumer agrees to these terms with the lender, and he or she must pay the loan at the time that they agree.
Applicants must also be careful not to apply to any loans that are scams. Some individuals impersonate real lenders and charge applicants with preliminary fees to allow them to obtain funds. However, applicants never have access to their funds even after making such payments. They should make sure to only apply for loans with trustworthy lenders, banks and other legitimate institutions. Furthermore, applicants should also keep an eye on the origination fee that institutions charge. They should make sure that the origination fee of the loan that they apply for is no more than two percent of the loan. Applicants should consider options if the fee is more than this percentage.
How to Apply for a Personal Loan
Candidates can apply for a personal loan once they determine that this type of loan is right for them. But before they go through the application process, they should prepare some documents necessary to complete the process. Applicants should be ready to provide the following:
- Annual household income
- W-2 forms and information about employers and previous work history
- Debt from other lenders
- Costs of living, including rent or mortgages
Applicants must present all this information that they gather to the bank to complete their application. Some lenders may require additional information, so applicants must provide for other documents such as school enrollment verification documents, recent paystubs and more. Personal loan applicants should consider all of their options before applying. Some lenders may offer initial rewards that may look appealing, but applicants should keep looking for low-interest rates to avoid needless costs. Applicants may receive funds within a week from submitting the application. In some cases, applicants obtain their funds the day after they apply depending on their level of need and their credit history.