Personal loans are a versatile financial tool that millions of Americans take advantage of each year. You can use a loan to consolidate debt, cover a car repair or medical bill, tackle a home improvement project, and even start a business or go on vacation. Whether you’re new to personal loans or familiar with them, consider the following before taking one out.
1. Personal loans can be unsecured or secured
Many personal loans are unsecured. This means you don’t have to guarantee them with collateral or a valuable asset you own, like a house or car. Some personal loans, however, are secured and require the pledging of collateral. If you default on a secured loan, the lender will have the right to seize your collateral. A key benefit of a secured loan is that it may be easier to qualify for than an unsecured loan.
2. There are many personal loan lenders
All personal loan lenders are not created equal. That’s why it’s in your best interest to shop around and compare lenders like banks, credit unions, and online lenders. When you do so, you should explore rates, terms, fees, and perks. If possible, prequalify for loans from a few different lenders so you can check and compare their offers without impacting your credit score. Prequalification can make it a breeze to find the right lender and loan for you.
3. Some personal loans have restrictions
While most personal loans are flexible and can be used for just about any expense, some lenders impose restrictions on how you may use their loans. Depending on the lender, you may not be able to use the loan proceeds for post-secondary educational expenses like college, university, or vocational expenses, or to make a down payment on a home. Read the fine print before committing to a loan to understand all the restrictions.
4. Good credit isn’t always required
A good credit score may open the doors to lower interest rates and more favorable terms. But you don’t always need good credit to take out a personal loan. Many lenders are willing to lend to borrowers with fair credit or even bad credit. These lenders will look beyond your credit score and consider other factors like your debt-to-income ratio and employment status. Keep in mind that the terms offered by these lenders may not be as favorable as terms offered to consumers with better credit scores.
5. There are online and in-person loan applications
These days, most lenders offer an online application process. You can visit the lender’s website and share your basic personal and financial details. While you will need to submit additional material like identity verification documents, bank statements, and pay stubs, the initial application process should only take a few minutes. If you prefer to complete an in-personal application, make sure the lender you choose has a branch near your home.
6. Personal loans could help improve your credit score
Payment history accounts for 35% of your credit score. If you make your personal loan payments on time, every time, you’ll be building and probably improving your credit score. Remember that if you miss a payment or even just pay it late, your credit score will be affected and go down instead of up.
The Bottom Line
If you use it responsibly and understand it’s not a long-term solution, a personal loan can come in handy every now and then. Before you move forward, compare all your options and read the fine print to lock in the best offer and avoid unwanted surprises down the road.
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