Most people opt for personal loans when they’re facing financial difficulties and need to cover an expense. It could be paying upcoming rent, medical bills, making home or car repairs. Some people also take out personal loans to buy a car, pay for a wedding or vacation. Whichever the reason, it’s crucial to establish if these loans are the best option for you. Let’s take a look at how personal loans work.
What Are Personal Loans?
A personal loan is any amount of money borrowed from financial institutions and lending companies that you repay in fixed monthly payments or instalments within a specified time. The repayment term is usually 1 to 7 years.
How Personal Loans Work
Since most personal loans are unsecured, lenders decided whether to give you a loan based on your creditworthiness. The lender looks into your credit rating, credit record, debt-to-income ratio, among other factors, to determine if you’re creditworthy. In most cases, the higher the credit score, the lower the interest rate.
Most personal loans have fixed interest rates. This means you’ll pay the same amount throughout your loan term. On the other hand, variable-rate loans mean your rate and payments change according to the market rates. For payment stability, look for loans with fixed interest rates.
If you have a poor credit score and don’t have time to improve it, you should consider applying for a secured personal loan or finding a co-signer. This option may also be a good idea if you fail to qualify for an unsecured loan.
Secured/Co-signer Personal Loans
If you have a low credit score, you’re likely to face sky-high interest rates or fail to get a loan altogether. To avoid this, you can opt for secured or co-signed personal loans.
Secured loans require you to pledge an asset as collateral. While these loans offer lower interest rates, you must be prepared to lose your asset if you fail to repay the loan.
Co-signed loans include a guarantor with a good credit score to help you secure the loan. The guarantor is responsible if you miss any payments.
How to Apply
To get a personal loan, you can apply online, via phone or by visiting a branch. When applying, the lender will likely check your;
- Annual income to check if you meet the minimum income requirements
- Credit score to assess your creditworthiness
- Debt-to-income ratio to decide if you will be able to repay
- Monthly housing payment
- Employment status and your employer’s info
- History of bankruptcy
To find the best deal, shop around and compare various lenders.