How a Personal Loan Works
Generally, you would first complete an application. The lender reviews it and decides whether to approve or deny it. If approved, you’ll be given the loan terms, which you can accept or reject. If you agree to them, the next step is finalizing your loan paperwork.
When that’s done, the lender will fund the loan, which means paying you the proceeds. Depending on the lender, these may arrive through a direct deposit into your bank account or a check. After the loan is funded, you can use the money as you see fit. You then have to begin repaying the loan according to the terms established in your loan agreement.
Defaulting on a personal loan could cause significant damage to your credit score. You could also lose your collateral with a secured loan or risk being sued by your lender to collect the debt.
Example of a Personal Loan
When considering a personal loan, it’s helpful to understand how much it may cost. The annual percentage rate (APR) on a personal loan represents the annualized cost of repaying the loan based on the interest rate and fees. The APR and loan term can determine how much you pay in interest total over the life of the loan.
For example, assume you get a $10,000 personal loan with an APR of 7.5%. The loan has a repayment term of 24 months. Using those terms, your monthly payment would be $450 and the total interest paid over the life of the loan would be $.
Now assume you borrow the same amount but with different loan terms. Instead of a two-year term, you have three years to repay the loan, and your interest rate is 6% instead of 7.5%. Using those terms, your monthly payment would drop to $304, but your total interest paid would increase to $.
Comparing the numbers this way is important if you want to get the lowest monthly payment possible or pay the least amount of interest for a personal loan. Using a simple online personal loan calculator can help you determine what kind of payment amount and interest rate are the best fit for your budget.
Though some lenders charge no fees for personal loans, others may levy a credit check fee, a loan origination fee, or-if you decide to pay off the loan early-a prepayment penalty payday loans in Marietta OH. Paying late could trigger a late payment fee.
Where to Find Personal Loans
The first place to look for personal loans may be your current bank or credit union. Your personal banker can advise you on what types of personal loans may be available and the borrowing options for which you’re most likely to qualify.
Personal loans can also be found online. Numerous lenders offer personal loans online. You can apply electronically, get a decision in minutes and, in some cases, get funding in as little as 24 to 48 hours after loan approval.
- Interest rate
- Repayment terms
- Borrowing limits (minimum and maximum)
- Collateral requirements
You can check your credit report for free at . When doing so, look for any errors that may be hurting your score and don’t hesitate to dispute them.
It’s also helpful to check the minimum requirements to qualify for a personal loan. Lenders can have different requirements when it comes to the credit score, income, and debt-to-income ratio that are acceptable to be approved for a personal loan. This can help you narrow down the loans that may best fit your credit and financial profile.
An unsecured personal loan requires no collateral to borrow money. Banks, credit unions, and online lenders can offer both secured and unsecured personal loans to qualified borrowers. Banks generally consider the latter to be riskier than the former because there’s no collateral to collect. That can mean paying a higher interest rate for a personal loan.