A personal loan can be borrowed for variety of purposes. Personal loan is very viable option among salaried individuals and entrepreneurs among others. Personal loans can be used to finance anything you wish such as vacations, personal expenses and even marriages. The reason for such wide appeal for personal loans is the low interest rates offered by such loan. Also, personal loans are given in lump-sum payments and repaid over time in monthly installments.
If you looking for various borrowing options, there are things that you should know before opting for personal loan. Personal loans is generally a good option for financing of smaller loan amount as compared to other loaning options. It is good option for someone with a good credit score. We’ll discuss all points in detail to help you find out if personal loan is the right choice for you.
There are six things to keep in mind before personal loans as follows:
How personal loans work?
What are the types of personal loans? From where can you get a personal loan?
All about Credit score
Interest rate and other fees in personal loan Personal loan Vs Other Borrowing options
How Personal Loan works?
Like most other loan, you apply for loan and submit the application; bank checks your credit worthiness before approving the loan. Fund is directly transferred to your savings account. Personal loan is a type of installment loan. It is given in lump sum and is to be repaid in equal monthly installments over the lifetime of the loan. The life time of the loan ranges from 12 to 84 months.
What are the types of Personal loans?
Personal loans can be of two type- Secured and Unsecured loan
Secured Personal loan- Secured personal loan is backed by an asset called as collateral to insure the repayment of the loan amount. This implies that in case you fail to pay back the original loan amount, the lender has the right to claim the asset.
Unsecured Personal loan- Here, unlike secured loan, this loan is not backed by any collateral. The loan amount is approved to the borrower based on their credit repayment history.
From where can you get a Personal loan?
One most common place to get personal loan from are banks. There are other financial institutions where you can get personal loan such as consumer finance companies, credit unions and peer to peer lenders.
All about credit score
Now you have already come across the term credit score above. A credit score is numerical term ranging from 300 to 900 to check the credit worthiness of the borrower. While calculating the credit score of an individual several factors such as repayment behavior and credit history are kept into consideration. With a good credit score you are able to get the loan approved at less interest rate whereas a bad credit score makes personal loan an unfeasible option for borrowers.
Interest rate and other fees in personal loan
Interest rate is the most relevant part to consider before opting for a personal loan. Other than interest rate, there are also certain fee and charges associated with personal loan. Let us discuss them in detail:
Interest rate- The interest rate charged on your loan amount depends upon your credit score, time period of loan and your lender. The longer the time period of your loan, the larger the interest rate.
Fees and charges- There are fees charged to cover the cost of processing the loan.
Other than that, there is fee called as prepayment fees. Some banks may also charge you in case you pay off the loan amount earlier than the due date as they would miss out on certain amount of interest payments.
Personal loan Vs Other Borrowing options-
Personal loan can be a very good option to finance your short term loan requirements. As already discussed, personal loan may not be the best choice for everyone. If you have good credit score, personal loan is the right choice for you since the amount of interest charged depends largely on it.
But, there are other alternatives for personal loan for various loaning requirement. If you are a homeowner, there are home equity loans.
A home equity line of credit offers flexibility in borrowing and can let homeowners borrow against the equity they’ve built up in their home. As personal loans are for shorter time frames, this loan type can be a better alternative for someone looking for larger loan amount at low interest rate. One thing to be aware of is that while this does provide various flexibility options, your house becomes collateral thus failure to repay can cause you to lose your house.
Bad financial situations can lead you to make rash decisions in borrowing loan without researching on the loan type. Thus, before applying online personal loan, check for other options and see if this s the right fit for you or not. Before signing in to any loan, check for all the fees and interest rate associated to determine the total cost that you would have to pay throughout the loan period.