While personal loans can often be a great solution to improve your situation, it’s important that you move forward with a clear understanding of the lending terms. When used right, loans offer solutions that will move you toward financial freedom. But you need to have a purpose for borrowing the money, and a strategy to pay the loan back in full.
Here are a few things you need to know about personal loans:
1. Installment Loans
Usually, personal loans are designed as installment loans. The lender provides a set amount of money upfront, then you have a certain amount of time to pay the loan back. Over time, interest is accrued on the unpaid balance. You have a minimum payment amount that needs to be met each month.
2. Accessing More Money
Unlike credit cards that allow you to add more purchases on the balance, personal loans usually only offer the funds at the start of the loan. If you need more money, then you will need to apply for another loan.
3. Two Types of Loans
The lender will offer either a secured or unsecured personal loan. If the loan is secured, then it means that the money is backed by collateral. If you default on the loan, then the lender can claim your asset. On the other hand, unsecured loans are based on your financial history, with no collateral offered. Usually, unsecured loans have higher interest rates compared to secured loans.
4. Timing for Borrowing Money
Here are a few of the reasons why people choose to take out personal loans:
- Home improvement projects
- Consolidating high-interest debt balances
- Covering the cost of living between jobs
- Medical services
- Unexpected costs, such as a home or car repair
5. Personal Loans vs. Credit Cards
Each person has a unique financial situation, which is why you need to consider your circumstances before choosing a loan. For example, if you want the option of ongoing spending against the loan balance, then a credit card might be a better solution. Or, if you have a low credit score, then sometimes these loans are more affordable compared to the high-interest costs you would be offered through credit cards.
6. Credit Scores and Loans
Not only does your credit score affect your ability to get these types of loans, but the loan inquiry can affect your credit score. When the lender is looking at information about your credit history, they will pull your credit. This process is known as a “hard inquiry” which might lower your credit score just a bit. Protect your credit score by only applying for personal loans when you need the money immediately.