Everyone Loves Payday Loans Near Me 550

Personal Loan Definition, Types, and How to Get One

What is a personal loan?

Understanding the need for a Personal Loan

The types of personal loans available

How Personal Loans Work

A Personal Loan Example

How to find Personal Loans

By Rebecca Lake

Updated August 09, 2021.

Reviewed by Thomas Brock

Fact verified by Katrina Munichiello

What Is a Personal Loan?

A personal loan is a sum of money that you are able to get to use for various uses. For example, you could use the personal loan to consolidate your debt, fund home renovations, or organize a dream wedding. Personal loans are offered by credit unions, banks as well as online lenders. The money you borrow must be repaid over time, typically with interest. Some lenders will be able to charge fees on personal loans.

The most important takeaways

Personal loans are loans which can be used to pay for various personal expenses.

There are personal loans through credit unions, banks, and online lenders.

Personal loans are secured, meaning that you need collateral to borrow money, or unsecure, with no collateral requirement.

Personal loans aren’t the same when it comes to their interest rates, fees, amounts, and repayment terms.

Click Play to Find Out More About Personal Loans

Understanding the Personal Loan

A personal loan can allow you to borrow money to pay for personal expenses, and then pay back the money over time. The personal loans are a form of installment loan that allows the borrower to get the funding in one lump sum. You could, for instance, use a personal loan to cover:

Moving expenses

Consolidation of debt

Medical bills

Wedding expenses

Home renovations or repairs

Funeral costs

The cost of vacation

Unexpected costs

These loans are different from other installment loans–such as student loans, auto loans, and mortgage loans–that can be used to finance specific expenditures (i.e. education, car purchase and home purchases).

Certain personal loan lenders restrict the ways that you are able to use a personal loan. For instance, you might not be eligible for a personal loan to cover tuition fees, college tuition or other expenses.

A personal loan is also different from a personal line credit. It isn’t a lump sum , but it is more similar to credit card. You have credit line you can spend money against and, as you do so your credit line decreases. You can then make available credit through a repayment to your credit line.1

With personal loan, there’s typically an end date fixed when the loan will be paid off. A personal line of credit in contrast is open to you for a long time until your account is satisfactory with the lender.2

The types of personal loans available

Personal loans may be secured or unsecure. A secured personal loan is one that requires a certain type of collateral in order to meet the requirements of borrowing. For instance, you may get a personal loan by using cash assets like a savings account or certificate of deposits (CD), or with tangible assets, like your car or boat. If you fail to pay the loan the lender may keep your collateral as a way to settle the debt.

An unsecured personal loan doesn’t require collateral to get money. Credit unions, banks and online lenders may provide both secured and unsecure personal loans to those who meet the criteria. They generally consider the latter as more risky than the former because there’s no collateral to collect. This could mean paying an interest rate that is higher for a personal loan.3

How a Personal Loan Works

To obtain a personal loan, you need to apply to a lender. It could be a credit union, bank, or online personal loan lender.

In most cases, you’ll first submit an application. The lender examines the application and decides to accept or deny it. If approved, you’ll be provided with the loan terms which you may either accept or decline. If you agree to them then the next step will be the finalization of the loan paperwork.

After that then the lender will then fund the loan and pay you the funds. Based on the lender, they could arrive through a direct deposit in your banking account or an actual check. After the loan has been approved, you can use the funds however you feel fit. You then have to begin paying back the loan according to the conditions stipulated in your loan agreement.

Defaulting on a personal loan can cause serious harm to the credit rating of your. It is also possible to lose your collateral with secured loan or face being accused of suing your loan provider in order to collect the loan.

A Personal Loan Example

When contemplating the possibility of a personal loan, it’s helpful to know what it could cost. APR is the annual percentage rate (APR) on the personal loan is the annualized cost of paying back the loan according to the interest rate and the fees. The APR as well as the loan term can determine how much you pay in interest total over the term that you take out the loan.

For example, assume you receive a personal loan with an APR of 7.5 percent. The loan is a loan with a term that is 24 months. Using those terms the monthly installment will be $450, and the total amount of interest you pay over the life of the loan will be $799.90.

Let’s say you want to borrow the same amount, but with different loan terms. Instead of a 2-year period, you have three years to pay back the loan, and your interest rate is 6% instead of 7.5%. If you apply these conditions, your monthly payments would be reduced to $304 but your total interest paid would increase to $951.90.

This method of comparing numbers is important for you to ensure that you get the lowest monthly payments or pay the least amount of interest on the personal loan. Using a simple internet-based personal loan calculator can help you figure out what type of payment amount and interest rate are the best fit to your budget.

Though some lenders charge no fees for personal loans however, some may charge a credit check fee as well as an loan origination fee, or if you decide to pay off the loan earlier, a prepayment fee. Paying late could trigger the payment to be late.

Where to Find Personal Loans

The first place to look for personal loans could be through your current bank or credit union. Your personal banker can inform you on the types of personal loans may be available and the loan options that you’re most likely to qualify.

Personal loans can be found on the internet. Many lenders provide personal loans online. You can submit an application online and get a response in minutes , and in some cases, get funding within 24 to 48 hours after loan approval.

When you are comparing personal loans either online or offline be sure to pay attention to the specifics. Specifically, consider these aspects:

Rate of interest

Fees

Repayment terms

Limits for borrowing (minimum as well as maximum)

Collateral requirements

You can check your credit report for free at AnnualCreditReport.com. While doing this, check for any errors that could be hurting your score and don’t hesitate to dispute the errors.

It’s also a good idea to look up the minimum requirements needed to qualify for the personal loan. Different lenders have different requirements regarding the scores on your credit, the income, and debt-to income ratio which are required to be accepted for personal loan. This can help you identify the loans which are the most appropriate for your credit and financial profile.