In recent years, personal loans have certainly grabbed the attention of consumers from all walks of life, in many cases leaving them annoyed or frustrated. Personal loans are designed to provide a financing option for just about any kind of purchase from a vacation to a yacht and can range anywhere from $1000 to $100,000, sometimes even more. They are supposed to be paid back within 5 years.
According to Todd Nelson, business development officer of LightStream, a division of SunTrust Bank, historically personal loans were seen as the last resort. However, today that’s not the case. In fact, today, many lenders permit you to fill out your entire application online, and to be approved almost immediately, receiving your funds often on the same day.
While personal loans may no longer be the last resort, you will want to fully understand your financial situation and the options available before getting one. Experts took the time to break down the myths about personal loans, and what it really entails to get one. Read on to learn how to find the best financial option for you.
If you are in the market for a personal loan, a good place to start is with the loans Bankrate.com has to offer. According to the President of Consumer Lending at Citizens Bank, Brendan Coughlin, if your credit score is less than perfect, it does not always mean you will not qualify for a loan.
Having a poor credit score or a less-than-perfect credit score may mean you can still borrow, but you will be penalized by having to pay a higher interest rate than if you had a good credit score. Let us look at an example of what it looks like to borrow $10,000 when you have a good credit score vs. a poor credit score.
Let’s say a consumer with a good credit score gets an interest rate of 5%, so over 4 years this person will pay $11053.92. Another consumer has a poor credit score, so he gets an interest rate of 20% and pays back $15086.40 for a difference of $4,032.48.
Remember, there’s no need to just resign yourself to the first interest quote you get. You should shop around for the best interest rates for a personal loan. You can do this quickly and easily online.
If you already have other debt, you should figure out a way to pay that off rather than adding to your current debt load. This will also help increase your credit score. But what’s most important is to make sure that you always make your payments on time. Just about one-third of your credit score comes from your payment habits.
The rates and fees for a personal loan can vary significantly from one lender to another. When you compare loans, don’t just compare the interest rate, because it can be very misleading if the lending institute has other fees. This is a common mistake made by consumers. Make sure that you look at the overall cost of borrowing the money.
To get a real cost of a personal loan, you need to look for things like origination fees charged by some lenders, which are generally in the range from 1% to 5% of the total loan. This can be a significant cost to you. Also know what the lender charges for payments that are unsuccessful. This can happen when you have an automatic payment, and the bank is not able to clear it, which is the equivalent of a bounced check. Some lenders will charge a fee for processing late payments, processing checks, or even a prepayment penalty if you pay your loan off early. Always know all of the charges, read the fine print, and ask your lender about the total amount repayable on your loan (TAR).
Usually, lenders offer personal loans as an unsecured loan. This means they do not require collateral.
If you decide to take out a secured loan, you will be required to put up collateral, like your vehicle, home, boat, or something else of value. This is the lending institute’s insurance that if you do not pay your loan, they can cover their losses. Lenders see secured loans as being less risky, and therefore they usually have a lower interest rate, and these loans are more likely to be approved. When you have an unsecured loan, the interest rate is generally higher than with a secured loan, but you do not have to tie your assets up as collateral.
If for any reason you cannot pay off your personal loan, the lending institute will almost always report the missed payments to the credit bureaus, and this will affect your credit score. If the loan is a secured loan, you will also lose whatever asset is the collateral for that loan.
You will get a much better rate on a personal loan than you will on a payday loan or cash advance, which are funds that are lent at an extremely high interest rate and paid back with your next paycheck. Personal loan interest rates are also usually much lower than credit card interest rates. This means it often makes more sense to get a personal loan and pay off a credit card than it does to just continue making the payments on the credit card. You will get ahead much faster.
Getting a personal loan is a big step financially, and you will want to shop around to get the best rate possible. Start by taking some time to evaluate your current debt load. For example, if you are currently struggling to make the minimum payments on your current debt load, you may have trouble qualifying for a personal loan. In a situation like this, it is a good idea to clear up the debt you currently have through a debt settlement or through the use of credit counseling.
In addition, you should make sure you look at the time frame of your debt and determine how fast you could pay it off, especially with the help of credit counseling. Make sure you look at all of your options to figure out the best way to attack your debt issues and your need for cash. Sometimes debt consolidation and repayment is relatively straightforward and can happen in less than a year, but if it’s going to take you longer than 12 months, you may find that a personal loan is the right solution.
The best way to get yourself out of the red is to forgo those luxury items for awhile. That might mean basic cable instead of the full meal deal, driving your current vehicle rather than buying a new one, or passing on that luxury vacation this time. A personal loan can also be extremely helpful in regaining your financial stability.