People take loans for different reasons like paying off a house, car, school, medical bills, or personal use. Some loans usually have specific purposes, but people who want a loan for anything go for personal loans.
What Is A Personal Loan?
Personal loans also referred to as signature loans, are loans that people use for almost any purpose. People qualify for these loans based on their income and credit history.
They are easy to apply and qualify for compared to other loans like car and home loans. However, unlike other loans, borrowers do not need to present collateral to qualify for a personal loan. According to the experts at Lantern by SoFi, “An unsecured personal loan allows you to borrow money for just about any purpose without your having to put up any collateral. That means not your home, your car, your boat, or any other asset.“
How Do Personal Loans Work?
Personal loans work almost the same as other loans. First, borrowers must apply for the loan and present the required documents. The financial institution looks at the documents, credit, and income history then determines if the borrower qualifies.
Once they approve, they send the money to the borrower in a lump sum, which they pay in fixed monthly installments. Borrowers get the money from personal loans faster than any loans, especially if the financial institution has pre-approved personal loans.
The borrower can use the money to fund a holiday, buy a gadget, pay hospital bills, start a business, or any other purpose. The amount borrowers have to pay per month differs from lender to lender depending on interest rates, payment period, and additional charges.
Interest is the amount borrowers pay on top of what they borrowed. Interest rates differ from institution to institution and are based on the borrowers’ credit score and history. A good credit score and history reduce the rates.
Usually, personal loans have fixed interest rates, which means borrowers pay the same monthly amount for the loan repayment period. However, if borrowers get a lender with varying interest rates, they might pay less or more depending on whether the interest rate is increasing or decreasing.
If you have bad credit, you can reduce your interest rates by having a loan co-signer with a good credit score.
Repayment time is the time the lender expects you to pay the loan. The standard repayment time for personal loans is between one and five years, depending on how much money borrowers get.
Since there are no prepayment penalties, borrowers can pay off their loans early, which helps save on interest. Borrowers also need to ask lenders if additional fees like origination fees could increase their pay.
Secured Vs. Unsecured Loans
Secured loans usually require that the borrower presents collateral, like a mortgage, auto loan, or home equity line of credit. Secured loans are typically used when borrowers are borrowing large sums of money.
Collateral is an item like a house or car that the lender holds possession of until the borrower pays the loan in full. Failure to that, the lender sells the item to recover the money. With secured loans, borrowers get lower interest rates, longer repayment terms, and higher borrowing limits. They are, however, harder to qualify for.
On the other hand, unsecured loans are loans with no collateral like personal loans, credit cards, student loans, and personal lines of credit. Since these are loans with no collateral, their interest is higher.
Lenders evaluate borrowers’ credit reports, credit scores, and debt-to-income ratio to determine their ability to pay off the debt.
Before applying for a loan, whether a personal or business loan, borrowers should research to determine the requirements and whether they qualify and whether it is the best to meet their needs, Lantern by SoFi is one of the best online platforms to find all the information about loans to help borrows make the right decision.