Cash 1 Blog
What Is a Personal Loan?
You may have seen the phrase 'personal loan' and wondered what kind of loan that might be as opposed to other types of loans.
For instance, a home improvement loan from a large bank is money designated specifically for the purpose of refurbishing your home. An auto loan is money designated specifically for purchasing a vehicle. So you can see that is it important to have a loan definition when discussing what is a personal loan.
Regardless of who you may be, at one point or the other, you will most likely be faced with expenses to cover. If you need extra money to travel, improve a project, make a significant purchase, take care of some educational issues, pay an old bill, consolidate your credit card debt or other critical and emergency circumstances, a personal loan can help you through them. This explains mostly why personal loans are understandably gaining more importance among people today.
What Is a Personal Loan?
A personal loan refers to money that you borrow from a bank, online lenders or credit unions which is paid back in fixed monthly payments, usually over the course of two to five years. Lender rates often range from 7% to 36% APR. In general, there are two personal loan examples - secured and unsecured personal loans. Notably, the unsecured is the most common type.
An unsecured personal loan means merely one that is not backed by collateral. A secured loan is backed by collateral and is usually cheaper. For example, a car collateral loan would use your car. A home mortgage uses your house as collateral. The only risk associated with this personal loan with collateral is that you can lose the collateral if you default on the payment of the loan.
Typically, a personal loan tends to be cheaper compared to loans on a credit card. Another advantage a personal loan gives you over other loan types is that the limits on how much you are allowed to borrow are usually higher. As such, a personal loan can consolidate debts into one payment at a lower rate for people with high balances on multiple high-interest credit cards.
What Are Personal Loans Used For?
The use of personal loans is enormous and cannot be overemphasized. As such, answering the question of what are loans used for is quite easy. Simply put, these loans are used to cover various kinds of expenses.
However, one very big but not a much-known use of personal loans is payment of debt. A personal loan can help you save some money and pay off your debt sooner. The process through which this happens is known as debt consolidation. This happens by taking out a personal loan for the amount of your credit card debt and using it to pay off the balance which means instead of making payments on the credit card; you will have just one easy payment for your loan.
Furthermore, using an instant personal loan to consolidate your credit card debt can be used as a smart way to save money. Based on to the Federal Reserve statistics, the average interest rate for credit cards is more than 13%. Thus, assuming your credit card balance was $10,000 and you only made the minimum payments, it would extend over the course of 15 years or more to pay off the card.
Also, you will eventually pay back above twice what you were originally charged due to interest payable on it. This means you would pay a total of $23,250. On the other hand, if it were a personal loan, the interest rate is always much lower. For personal loans in general, the average rate is usually something around 10%. Some lenders can offer you rates as low as 5%. In contrast to the situation obtainable above, assuming you get a five-year personal loan with a 10% interest rate and proceed to use it to cover your credit card balance of $10,000, you will be paying back just $12,748 eventually. That is a total saving of more than $10,000, and you will also be free of debt for ten years.
Getting a Personal Loan
It is important to highlight as precisely as possible the steps you will take to obtain a personal loan.
Step 1: Check your credit score
Your credit score is a significant determinant of your chances of getting a good personal loan. Your Equifax credit score would range from 280 to 850. Indeed, it can be described as an educational score because the score that you see may be different from the one your lender sees. If your credit score ranges between 725 and 759, it is considered to be very good, and if it ranges from 760 to 850, then it is excellent. In other words, the higher your credit score, the more affordable your loan is likely to be. By way of example, if an advertised personal loan carries an interest rate of 6.9 percent, that makes it several percentage points below the average credit card interest rate when last reported by the Federal Reserve, it was 13.6 percent.
Step 2: Understand pre-qualification requirements
Knowing what is a personal loan and what your credit score is not the ultimate thing when it comes to applying for one. There is a stage of pre-qualification. You should visit online lenders or personal finance sites to know whether or not you pre-qualify for a loan. More often than not, the average lender performs a soft credit check during pre-qualification which does not affect your credit score.
Step 3: Know personal loan requirements:
If you don't provide any of the below, you may not pre-qualify for a loan.
- Your Social Security number
- Your Income
- Your monthly debt obligations such as rent, student loans and so on
- Your address, email and phone number
- The name of your employer, phone number, and your work address
- Your previous addresses
- Your date of birth
Reasons You Might Be Denied a Personal Loan Include:
- Low credit score
- Having very little income
- Having little or no work history
- Having a high debt-to-income ratio (usually if it is above 40%)
- Having too many recent credit inquiries like credit card applications
Make Comparative Analysis of Your Offers and Other Credit Options
Before you make application for a personal loan, make sure that you qualify for a 0% credit card. If your credit is good, you can perhaps get a credit card that has 0% interest on purchases for a year or even more. Therefore, if you will be able to repay the loan in that time, then a credit card is your cheapest option.
In this case, the personal loan example you should consider is a secured one. The reason here is that if your credit is not that great, you are likely going to get a better interest rate with a secured loan. As stated earlier, this will require collateral from you, commonly a car, house or even savings account. However, if you have a house, it is more advisable to go for a home equity loan or line of credit because they tend to be much cheaper than an unsecured loan. On a different note, you may as well consider adding a co-signer for a personal loan. If you do not qualify for a loan on your own, a co-signed personal loan is a good option which you should consider. In a co-signed personal loan, the lender often considers the credit history and income of both the borrower and co-signer before approving the loan.
Try to draw up a large list of different lenders that offers personal loans. Additionally, you should try to get a proper estimate from every one of them to find out what interest rate you qualify for as well as possible repayment terms. The point here is that, by comparing different lenders, it becomes easier for you to get the best deal.
Present the Necessary Documents for a Personal Loan
After pre-qualification, you will be required to present certain documents for approval of your application. Usually, the request for these documents is geared towards three purposes which are:
- Identification: Your passport, driver’s license, state ID or Social Security card
- Verification of address: Your utility bills or copy of lease
- Proof of income: Your W-2 forms, pay stubs, tax returns or bank statements
After this, the lender is expected to run a hard credit check which may briefly knock a few points off your credit scores. Upon final approval of your application for the loan, you should receive the money according to the lender's terms, which more often than not happens within the space of a week.
A personal loan is specifically for an individual borrower and can be used in any way the customer sees fit; from buying groceries, making emergency rent payments and just about any reason you can think of. A personal loan, and in particular, a no credit check loan from CASH 1, is a loan that is based on your income, and your ability to pay off the loan in the terms agreed upon. There is no credit check, no bank account necessary, and you can get one if you have bad credit or no credit.
For those with no credit, a personal loan can help build personal credit and improve a credit score fast.
A personal loan is paid for with your anticipated income and is never set up in a way that you will not be able to pay it back while still paying your bills and meeting other financial needs.
So come see us at CASH 1 and find out if a personal loan is right for you.
Noel Ballon is a skilled personal finance writer passionate about helping people to succeed financially.
As a guest writer for CASH1, Noel has shared his knowledge on a variety of financial issues, including budgeting, saving, investing, and retirement planning
Noel has a background in economics and finance with over five years of experience writing in the financial sector.
He works to simplify complicated financial ideas so that people from every area of society may understand them.
When Noel isn't writing, he likes keeping current on the latest financial sector changes and looking for fresh approaches to assisting people in choosing wise financial decisions.