When a person needs cash, they often turn to their credit cards. However, before doing so, consider a personal loan. Thanks to the internet, getting one of these loans has never been easier.
The ease of getting these loans comes with drawbacks. A person needs to understand what they are agreeing to before requesting funds. This ensures they don’t end up with a loan they cannot afford.
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How Does a Personal Loan Work?
When a person is looking for loan services, they might be offered a personal loan. Some loans of this type are secured with an asset, such as a vehicle. Other loans, however, remain unsecured. The borrower doesn’t need to put up collateral or another asset to secure the funds.
What Might a Personal Loan Be Used For?
A borrower can use a personal loan for a variety of reasons. They may wish to pay for a large purchase. Many people obtain this type of loan to consolidate their bills or to pay off a high-interest credit card. The options are endless.
How the Funds Are Received
Once the loan is approved, the lender typically issues a lump sum to the borrower. This may be deposited into the borrower’s checking account or received in the form of a paper check. The borrower then pays the loan back over the agreed-upon time.
The Borrower’s Credit Score
The borrower’s credit score dictates how much they will pay in interest. A high credit score means a lower interest rate, as the lender is taking on less risk. Most lenders today require a person to have a credit score of 660 or higher to secure a personal loan.
This credit score is determined by several factors. The amount of money a person currently owes plays a role. In addition, their prior payment history is taken into consideration when calculating this score.
In addition to a person’s credit score, the lender looks at other factors. This includes the borrower’s income and work history. They want to ensure the funds can be repaid as agreed.
Fixed or Variable Interest Rate?
When a person goes to borrow funds, they might find they have a choice between a fixed and a variable interest rate. A fixed-rate loan is a financial product that comes with consistent monthly payments. The borrower knows exactly how much they will pay each month on the loan.
A variable interest rate loan, in contrast, is one where the interest rate may vary. The rate tends to be low initially. However, it increases after an agreed-upon time frame. The borrower could end up paying significantly more on this type of loan as the loan term progresses.
The Drawbacks of a Personal Loan
Personal loans include drawbacks a borrower should know about. The longer loan term seen with these financial products means the borrower pays more in interest. In addition, the interest rate increases with the length of the loan. Furthermore, the borrower may pay a loan origination fee and other fees.
Individuals with good credit scores should consider a personal loan over other financing options. This is an excellent way to secure funds quickly. For those with a less-than-stellar credit score, other options should be explored.
Nevertheless, a person who doesn’t have excellent credit may still wish to obtain a personal loan. This type of loan benefits the borrower if they can pay off debt with an interest rate that is higher than the interest rate on the loan. Consider all options and do the math before applying for the loan. This is the best way to determine if a personal loan is right for the situation.