Personal loans can have a lot of financial benefits if you find the right loan with the right lender. The right personal loan can help you pay off a big-ticket loan or even reduce high-interest credit card debt. When used correctly, a personal loan can be a powerful personal finance tool.
There are many reasons people seek personal loans. Some of the most common uses of a personal loan include:
- Debt consolidation
- Home renovations
- Medical expenses
- Wedding expenses
- Moving expenses
- Large purchases
- Funeral expenses
- Funding a small business
While you can take out a personal loan to fund educational needs or to purchase a vehicle, it may not be the most affordable way. Student loans and car loans often have much lower interest rates.
Personal loans offer flexibility. Unlike auto loans, mortgages and student loans, you can use the funds you receive from a personal loan to cover a multitude of expenses. Flexibility makes personal loans an attractive option to people who need access to funds within a short time.
How to choose a personal loan
When you’re looking for a personal loan, the first thing you need to consider is why you’re getting the loan. Once you have identified what you’ll be using the money for, you can narrow down your search.PROS AND CONS OF LONG-TERM PERSONAL LOANS
For example, if you’re consolidating debt and you have an iffy credit score, consider talking to your credit union. If you’ve been a customer with the credit union for a while, they may be more willing to extend you a loan to help free up cash than another lender.
Keep in mind that if you take out a loan to consolidate debt, they may require that you close credit card accounts or require that you let them submit payments on your behalf to ensure you use the funds as requested. Make sure your credit union offers competitive rates, so you fee up as much cash as possible to pay off your debt.
If you want to use a personal loan for home renovations, make sure to look for companies that offer higher loan amounts with low-interest rates. You may even be able to find companies that specifically provide personal loans for home improvements or repairs.
If you have questionable credit, you may be more limited in your options for personal loans. While there are still options available, you may have to pay higher interest rates or settle for a smaller loan amount.
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If you have a specific purpose for your loan, you have more options for saving money. For example, several companies offer medical loans. These loans typically offer a much lower APR. Similarly, debt consolidation loans also offer lower APRs than credit cards and other personal loan options. Take a few minutes to look up your options online. Spending an hour or so reviewing your choices could help you save thousands in interest fees over the life of your loan.
Understanding the application process, fees and interest rates
Applying for a personal loan is simple. If you opt to work with an online lender, you may be able to “prequalify’ for a loan. The prequalification doesn’t guarantee that you will be approved but lets the lender know you’re a potential borrower.
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The prequalification process includes a soft credit pull. A soft pull means lets the lender look at your credit score and credit report, but it won’t appear as an inquiry. If you want to shop around for a loan, prequalification can save your score by limiting the number of hard inquiries that appear.
Personal loan applications will request the following information:
- Name and address
- Social Security Number
- Employment status
- Proof of income
- Rent/Mortgage statements
- Access to credit report
- Debt statements (if you plan to consolidate)
Many lenders (even local credit unions) have an online application available. Once you fill out the form and submit your application, you can expect a response within a few hours. The lender may ask for additional information and conduct a short interview. If the lender approves your personal loan, you’ll have to fill out additional forms accepting the loan and payment terms.
One of the most important considerations when choosing a personal loan is the interest rate. Your credit score, where you live, your choice in a lender, the loan amount, and the purpose of your loan can all affect the interest rate you’ll pay. If you have a high credit score, you’ll likely be able to snag loans with the best rates.
Taking out a personal loan can be a simple way to free up some cash to pay off debt, build your business, take a vacation, or handle a family emergency. However, a personal loan is only beneficial if it’s the most affordable way to access extra cash. Ask questions, look at your finances, and come up with a plan before taking out a loan so you can enjoy the benefits of personal loans while reducing your financial risk.