What is a personal loan and how to apply
What is a personal loan and how to apply:
A personal loan is a general form of an unsecured loan that helps people transact personal business to obtain credit. In contrast to home loans, for example, or car loans, which are usually attached to a purchase, personal loans can be spent on just about anything, be it in order to pay off other obligations, to pay for a wedding, treatment, a vacation, etc. Through personal loans, borrowers can borrow money without providing collateral; they instead borrow the amount of money based on his or her creditworthiness and ability to repay back, hence it is common among people who require cash urgently.
In this article, I’ll take my readers through the simple guide to personal loans, how they work, the advantages of getting one, their prerequisites, and how to get the most of personal loans.
What is a Personal Loan?
Personal loan can be defined as a one-time cash advance on a personal basis for which a borrower applies to an appropriate financial company like bank or a credit union or an online company. This is money that is taken and is supposed to be paid back at another time usually in equal instalments monthly in addition to interest charges. Personal loans have tend to have a stated rate of interest which the borrower will pay in installments every month that when added to the capital gives a constant amount till the loan period which may vary between few months or years.
Moreover, personal loans are regarded as unsecured loans and unlike the secured loan where one puts an item such as the house or car as a surety then the money lender is a little bit prone to risk for offering the money for the loan instead of security. This is why interest rates on personal loans can be higher than on secured types of credits. However, there are those who wish to borrow personal loans who have good credit ratings; in such instances personal loans can be cheap.
Common Uses of Personal Loans:
Debt Consolidation: Pay off several debts with a new one with lower interest rate charged on the debt.
Medical Expenses: Pay bills incurred in a hospital or treatment received in an emergency.
Home Renovation: Renovate, repair or improve the home interior and exterior.
Weddings and Events: Use on wedding, anniversary, or any other special events.
Vacations: Covers the expenses for dream holiday or family vacation.
Emergency Expenses: For example; to cater for events like car breakdowns or one of the family members falling seriously ill requiring a costly treatment.
Personal Loans; How to Secure One
Personal loan is relatively easy to get; however, the borrower should work out all the necessary steps to have the optimal conditions. This piece will help anyone who wants to take a personal loan understand how it is done.
Step 1: Determine the Loan Amount
The first thing that any applicant has to decide about before taking a personal loan is the required amount of money. This is important because taking a loan means we are going to pay for that cash and extra charges will be included. I want to ensure that people spend exactly what they need for the expense in question – be it debt consolidation, medical bills, home renovation, and any other – and no more than that.
Step 2: Check Your Credit Score
Credit score has a strong influence towards approval of the personal loan. When you borrow, a good credit rating will see you get this credit at a cheaper rate while the low rating will have the credit offered at steep rates or not be granted at all. You can get it online at any online platform or your bank may offer it for free of cost. If your score is less than that then maybe you want to enhance it in order to qualify for the loan the time, maybe pay off some debts, or correct errors in credit report.
Step 3: Research Different Lenders
As already mentioned not all lenders operate with the same expectation thus it’s important that you compare. Stay focused on those to include; traditional banks, credit unions and online lenders. Of course, interest rates, fees and terms will vary from institution to institution. But many online lenders nowadays provide pre-qualification checker that gives people an idea of the estimated rates for any loan without having to affect their credit score. When evaluating loans, focus on the Annual percentage rate which is a reciprocal of the annual rate charge by the loan whereby the rate include charges for the whole credit.
Step 4: Gather Required Documents
Indeed, to make the procedure easier, all required documents should be prepared beforehand. These may include:
Identification proof such as passport or a driving license or even Adhar Card.
For self-employment and proof of income other than paying stubs, within the last 3months, documents include; Bank Statements, Income tax returns, Pay slips or salary advices.
Employment details
Utility bills or rental agreement, any document that could prove ones residence.
They may include credit status, other loans or basically anything else that the lenders may choose to ask.
Step 5: Submit the Application
Finally, now that you know the right plugin for you, as well as assemble all the necessary documents for the application, it is high time you submit your loan application with the lender. In most cases, lenders allow you to apply for the loan online although you can apply for the loan in a bank or credit union physically. Complete the application form correctly paying attention to all the entries made. Also, provide the necessary documents, to ensure that one meets all the qualifyings factors such as; income limits.
Step 6: Wait for Approval
After making your submission, the lender processes your details and may take a few days to a couple of weeks to approve the loan. With good credit rating and all necessary documents getting approved by some of the lenders may take just a few hours. Once the cash is approved, the money is electronically deposited to your account in less than 72 hours.
Step 7: Repay the Loan
If the loan has been provided, then you will be expected to make equal monthly repaying of the loan together with the interest charged on it. You could agree to make automatic payments or to receive regular reminders so as not to miss any of the payments deadlines. Paying bills or loan after the due date is damaging since it leads to a lowered credit score and attracts penalties or ;high interest rates.
What is a personal loan and how to applyWhat is a personal loan and how to apply
Everything You need to Know about Taking a Personal Loan
Assess Your Financial Situation: Ensure that monthly installments which are supposed to be paid can well be paid without hampering. Use a loan calculator that assists you to arrive at the repayment installments based on the terms of the lender, and the interest rate charged on the loan.
Improve Your Credit Score: Before applying, there is always time to build up credit score by clearing all balances and ensuring one’s ration is low.
Compare APRs: Don’t just focus on the percentage rate; it is always more useful to compare nominal rates annually or Average Percentage Rates (APR) from different lenders. It is a method of stating the cost of credit which goes further than the interest rates, fees and other charges in order to offer the consumer the Glover picture of the cost of the loan.
Read the Fine Print: Before formulating the repayment plan, read the loan agreement cautiously and find all the charges that probably are attached with the loan, extra cost of paying the loan amount before the given date, and any other clause that might not consider suitable for the formulation of the repayment plan.
Avoid Overborrowing: Although you may be tempted to borrow more than you require, understand that, the higher the amount of money, the higher amount of interest you are likely to pay in the future. Do not borrow more than needed to achieve the goal which you have set for the money borrowed.
Consider Alternatives: If a person’s credit is not good enough to be approved or the interest rates for a personal loan are too high then look for other methods of borrowing as for example credit card with 0% for the first year or a HELOC.
Advantages and Disadvantages of Personal Loans
Pros:
Flexible use: In contrast to other types of credits that are associated with some particular purchase, personal credits may be spent for anything.
Fixed interest rates: The interest on the personal loans is often fixed which makes a constant monthly payment convenient to most borrowers.
No collateral required: Personal loans are unsecured and hence you can’t lose your valuable assets such as your home or car when paying the borrowed amount.
Cons:
Higher interest rates: A disadvantage of the unsecured loans is that it is easier to secure them at relatively higher interest rates than in the case of secured loans.
Impact on credit score: Inability to make payments is well known to bring significant impacts your credit score.
Origination fees: Most lenders will require you to pay a fee for the processing of your loan which is additional.
Conclusion
Borrowing money responsibly through personal loans can therefore be helpful at some point. Irrespective of the reason; debt consolidation, emergency medical, or for home renovation, personal loans are quick and suitable. However, one should always look at the budget of the of the individual, read through the loan agreement and look at the offers on the table. It is possible to learn how to make personal loan become highly advantageous and not cause you much stress at all.
- How does Taking a Personal Loan Affect my Debt-to-Income Ratio
- Can I Negotiate Personal Loan Terms with the Lender?
- What is the Role of Credit Unions in Providing Personal Loans
- Are there any Restrictions on How I can Use Funds from a Personal Loan
- How do Personal Loans Compare to Credit Cards in Terms of Interest Rates
- What are the Steps to Follow if my Personal Loan Application is Rejected?
- Can I Refinance a Personal Loan to get a Better Interest Rate
- Are there any Specific Eligibility Criteria Based on Income for Personal Loans?