6 Important Things To Know About Financial Loans
Every year, millions of people use loans to consolidate their debt, pay for unexpected expenses, and much more. In the US alone there are more than 20 million people who have personal loans.
They aren’t for everybody though. Here are six important things you need to know about financial loans.
1. How do personal loans work?
Personal loans work on the concept of installments. This means that once you’ve borrowed a fixed amount you will have to pay it back monthly with interest. You can get short-term loans and long-term loans and can last up to 84 months. Once your loan has been fully paid off, your account will be closed. If you need more money after this, you will have to apply for a new loan.
Loan amounts vary depending on what you need and from lender to lender. They typically range from around $1,500 to $100,000. You won’t necessarily get the amount you want. Your credit score is a big determining factor when it comes to who much you can get, at what interest rate, and from who. It is important that you choose the appropriate type of loan for you and your current financial situation.
2. Types of personal loans
When it comes to personal loans there are two types:
Unsecured personal loans
These are personal loans that aren’t backed by collateral. The decision to give you a loan is based on your financial history. If you want a lower interest rate, consider a secured personal loan.
Secured personal loans
These are personal loans that are backed by collateral. When you are unable to pay back the loan amount your lender has the right to claim your assets to pay back the value of the loan.
3. Where can you get a personal loan?
Banks are the first place to come to mind when you think about where to get a loan. But they aren’t the only financial solution out there. Nowadays, it is easy to find reputable mortgage lenders, consumer finance companies, credit unions, peer-to-peer lenders, and even online lenders. These are only a few legal institutions/people who offer loans to people who qualify.
4. Personal loans vs. other lending options
A personal loan is one way to get the cash you need for a variety of situations, but it isn’t the only way or necessarily your best choice. If your credit is good, you could qualify for something called a balance transfer credit card. These have a 0% introductory APR. The way this works is that you pay off your balance before your introductory rate expires. It isn’t necessarily the best option though. If you are unable to make the payment in time or make a late payment, you could end up in even worse debt, with hundreds and even thousands of dollars in interest charges.
A homeowner might want to consider something called a home equity loan or line of credit. These help you secure larger loan amounts with lower interest rates, but they also make your house the collateral for when things go wrong. Your lender can foreclose your house to make back the money you own, so this is a tricky option.
5. Impact on your credit scores
When you apply for a loan you have what is called hard inquiry and a soft inquiry. A hard inquiry is a process whereby the lender pulls your credit as part of the application process. It typically lowers your credit score by a few points and stays on your credit report for about two years.
If you have taken a loan out with a lender before, or have an account with one will do a soft inquiry. This does not impact your credit score as they are simply reviewing your credit.
6. Interest rates and other fees
Interest rates and fees (hidden and visible) play a large role in how much you pay over the lifespan of a loan. Fees can widely vary from lender to lender. Consider the following when choosing a lender:
- Interest rates – These typically range from around 5% to 36%. This is dependent on your credit score and the lender. Generally speaking, the better your credit score is, the lower your interest rate will be. Also, consider your loan term. The longer you take the loan out for the longer you have to pay interest and the more you will pay.
- Origination fees – Lenders are allowed to charge a fee to cover the cost of processing your loan. These fees can range from 1% to 6% of the full loan amount.
- Prepayment penalties – Lenders can charge you a penalty fee if you pay off your loan early. This is because early repayment means that they miss out on interest.
Now that you have been armed with the knowledge, go out and find the right financial solution for you.