What You Should Know About a Personal Loan
A personal loan refers to a type of credit that’s usually used for a certain purpose, like renovating a home, buying a car, consolidating debt, financing a holiday, or even funding a new business. It can be an excellent way to sort out cash flow problems. A personal loan is great for various uses so long as you don’t use the funds for luxuries you can’t afford. Moreover, each time you assume new debt, you need to know what you’re getting yourself into. The following are some essential things you need to know about personal loans before you apply for one.
Know your credit-worthiness
Before applying for any personal loan, ensure you’re loan-ready. Be sure to check your credit report and credit score to evaluate your credit-worthiness. Make sure there aren’t any mistakes in your credit report that might prevent the approval of your application.
Different lenders have their own underwriting rules, so all their offers won’t be the same. Complete an application online and it will be submitted to different vendors. It’s faster to apply online than to visit multiple banks. Besides, online lenders usually have higher chances of approval and better terms of loans. Once you complete the application, you’re not required to accept any offers, but it’s an excellent and fast way to compare lenders.
Know the fees involved
Virtually all personal loans come with fees apart from the principle and interest. Evaluate all your offers carefully and find out “hidden” fees. Lenders sometimes may charge lower interest rates, but will make up the difference with higher fees. In such cases, you should ensure that you know the overall cost of the personal loan so you can compare different lenders. What might seem like a nice offer on paper could carry heavy fees.
Lenders don’t want you to repay your loan early. You may even incur penalties for repaying the loan early. If possible, it’s advisable to take on a loan that doesn’t have early repayment penalties. In some cases, however, it’s not all bad repaying the loan early as the fees may be less than what you’ll pay in interest payments.
Interest rate types
There are two kinds of interest rates: fixed and variable. Fixed interest rates are usually higher than variable interest rates when you get the loan, but your monthly repayments always stay the same. Variable interest rates can be low when you get the loan, but interest rates change with your loan payments. Variable interest rates may seem attractive at first glance, but fixed interest rates are a safer bet.
Unsecured versus secured personal loans
Unsecured personal loans typically have higher interest rates as lenders take a bigger risk. But you can get a better rate if you have any property you can use as collateral for the loan. The drawback of this is that defaulting on the loan will put your assets at risk. This is why it’s important to be sure you can afford to repay the loan. It can be quite stressful to apply for a personal loan, but securing a loan may be a huge boost in your time of need. Just be cautious with lenders who pressurize you to take out a loan.