Personal Loans: 6 Things To Know
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How Personal Loans Work
After taking a personal loan, over the term of the loan, you have to pay back the fixed amount of borrowed money in monthly installments, along with interest. The duration of the loan is usually 12-84 months. Your account is closed after you repay the complete amount.
Where You Can Get A Personal Loan
Banks are the most common institutions which offer loans. You can also get a loan from peer-to-peer lenders, consumer finance companies, credit unions, and online lenders.
Types Of Personal Loans
Personal loans are of 2 types:
- Secured loans: Secured loans require you to provide collateral, such as a CD or savings account. If you default on your payments, your lender can legally take over your asset as payment for the loan.
- Unsecured loans: Unsecured loans are not backed by collateral, and typically have a higher interest rate than secured loans. You are granted such loans based on your financial history.
Impact On Your Credit Score
After you apply for a loan, your lender will review your credit (hard inquiry). This may lower your credit score by a few points. Generally, hard inquiries stay on your credit report for approximately 2 years.
When you’re looking around for the best rate, lenders you already have an account with may check your credit (soft inquiry). As soft inquiries don’t affect your credit score, consider consulting such lenders about their interest rates.
Interest Rates And Other Fees
Some factors make all the difference in determining how much you pay for the loan. These include:
- Interest rates: Interest rates may range between 5% and 36%, based on your credit and lender. Typically, the higher your credit score, the lower the interest rate is.
- Prepayment penalties: Some lenders charge a penalty for repaying your loan early as they miss out on interest.
- Origination fees: Some lenders charge a fee (1 to 6% of the loan amount) for setting up the loan.
Personal Loans Versus Other Loan Options
In some cases, a personal loan may not be the best option for you. If you have good credit, you may qualify for a balance transfer credit card with a 0% introductory APR. You could also consider a credit card if you can clear the balance before the interest rate increases. If you’re a homeowner, consider a home equity loan or line of credit.
