Personal Loans - A Complete Guide

Many people use a "personal loan" to fund personal expenses such as home improvements, cars and sometimes just to pay bills. This guide will help you find the personal loan that is right for you.

Important Terms You Need to Know

Amount: A personal loan may make available up to $10,000 at most banks. There are some exceptions, i.e., Capital One offers personal loans up to $30,000 and Wells Fargo up to $100,000 for people who qualify.

Average interest rates: Interest rates typically depend on your credit score and/or your ability to pledge assets that can secure the loan. Collateral and a good credit score usually tend to lower interest rates while those with lower credit scores and no way to secure the loan will likely pay higher rates than are charged on a mortgage or car loan. Rates on loans to borrowers with good credit scores are about 8.48% to 14.49% for a five year term and averages 10.64% on a 24-month term at a commercial bank.

Length of term: Terms can range from a couple of months up to 5 years in duration. Borrowers may be offered lower rates on longer term loans.

Fixed payments: Typically payments are structured so that the repayment of capital plus interest is the same until the loan is repaid.

Reasons to Use Personal Loans

There are plenty of uses for personal loans, here are a few:

• Pay off a one-time emergency expense such as car repairs and home-improvements because the interest-rate will likely be lower than using a credit card for this purpose.
• A personal loan may not require security and one does not always need a good credit score to qualify.
• Many people use a personal loan to consolidate debt in order to have a lower interest-rate and or reduce monthly payments.
• Other reasons to use a personal loan include paying tuition to extend education, starting a small business, funding a wedding or other one-time event or relocating one's home or business.

Advantages of a Personal Loan

Personal loans are time-saving because decisions as to the borrower's qualifications can be made immediately by the lending institution and paperwork is usually kept to a minimum by requiring less information, i.e., employment and income.

As no security is required for a personal loan, borrowers need not risk their homes or businesses and they save money because interest rates are lower than credit card interest rates. Structured repayment plans ensure the term is fixed and the payoff date is confirmed.

A real bonus of a personal loan used to consolidate debt is that it may improve you credit score if used to pay off multiple credit cards reaching their debt limits. One disadvantage, however, is that there may be a prepayment penalty for paying off the loan before the payoff date, so borrowers should read the fine print carefully before signing.

How You Can Qualify

Things that determine your qualifications to be approved for a personal loan include your credit score, proof of income and possibly having cosigners who can ensure the lender will be repaid the loan if the borrower fails to do so. Prospective borrowers must provide their credit scores and credit history to show reliability in paying bills over time. A poor credit score and history could mean failing to qualify or paying higher rates.

Lending partners may ask for a few pay stubs or tax filings to show how much the applicant makes to gage ability to make monthly payments. Lending partners sometimes require a co-signer who is better off financially and/or has a good credit score and who will commit to paying off the loan upon a default.

Getting Approved with Bad Credit

Even with a poor credit score, persons seeking a personal loan may still be able to get one by agreeing to a higher rate of interest and/or providing collateral that is acceptable to the lender. Just remember an asset, such as a car, used as collateral may be lost if the loan is not repaid as agreed. If a co-signer is required, someone with more money and better credit pledges to follow through to pay off the loan if the borrower fails to do so.

Paying Your Loan Back

Most people find loan repayment simple as monthly payments and payoff date are clear from the beginning, but if something happens so that the loan cannot be repaid as agreed to (default), this is what will likely happen:

• Your credit score goes down making it harder to borrow money in the future.
• Some lending partners charge penalties if payments are not made and this can increase the debt and makes it harder to pay back.
• Banks can sell off defaulted loan to collection agencies who may use aggressive means to make borrowers repay loans.
• Depending on the lender and the type of default, a lien may be placed on the borrower's property or even their income thus making it hard to sell their property or even to access their own money.

Top Three Loan Application Tips

Thinking about applying for a personal loan? Here are a few pointers to keep in mind:

• If you are young without much of a credit you may want to avoid telling lending partners that your parents won't give you a loan because that leaves the impression that you are not trustworthy and less likely to repay a loan
• If you are seeking a personal loan to make a down payment on an expensive item, you should be prepared to explain to the loan officer how you intend to pay off the rest of the cost of the item.
• It is recommended that you never beg to be approved for a personal loan because that looks like you are desperate and have likely been turned down by other lending partners because they saw you as a poor risk.

Need a loan? You are not alone. The good news is that an application to us for a personal loan can be made on line and only takes a few minutes. Get started now.

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