Personal Loans: A Guide to Understanding the Essentials
If you have debt or need help paying for a large purchase, then you may want to consider a personal loan. Personal loans, including online personal loans, provide you with the money you want but may not have right now. This makes it convenient for you to buy things, including cars or a home, take out money for school or even invest in your business.
Personal loans are either secured or unsecured. The majority are unsecured, with the amount you can take out determined by your credit score. In some cases, personal loans are secured against collateral, especially if your credit score is classified as fair or low.
Personal loans can be very beneficial, but there’s a lot to know before you apply for one, even if you work with one of the best personal loan companies. We’ve presented some important facts about personal loans and what you should consider before searching for a lender.
$5,000 – $2,000,000
6 Month, 1 yr, or 2 yrs
As little as one business day*
As fast as 1 day
What Is a Personal Loan?
A personal loan is a type of installment loan. You'll borrow a specific amount of money that you then pay back with interest over time. Most loans have a specific length, which means that you'll know exactly when this bill will be paid off in the future.
According to the Chamber of Commerce, personal loan usage grew by 19.2% in the first quarter of 2019. Today, there are approximately 21.1 million people with outstanding personal loans in the United States. The average debt that borrowers owe is $8,402. Around 19.1 million Americans have unsecured personal loans, while 176 million turned to credit cards instead of personal loans.
Personal loans are more accessible than ever before, which is why they're seeing such growth. They're used for debt consolidation, credit-card refinancing, home improvements, vacations, major purchases and medical bills among other purposes. You can even obtain a personal loan for business startup expenses.
Why Use Personal Loans?
You can choose to use personal loans for many reasons. For instance, personal loans can be used to:
- Consolidate your debts
- Pay for a wedding
- Make a major purchase
- Support your business
- Pay off credit card debts
- Deal with medical bills or unexpected expenses
- Find lower interest rates to save money
- Finance a renovation on your home
The benefit of a personal loan is that it combines your debts into a single, more manageable loan. You'll have one payment, and the loan is likely to have a lower interest rate than credit cards or other unsecured lines of credit.
Personal loans are generally given out based on your credit score and income. You may be able to borrow anywhere from $1,500 to $100,000 or more, but your creditworthiness is what matters most in this equation. People with good credit have an easier time getting a better loan with lower interest rates.
What Is the Difference Between a Personal and Business Loan?
Personal loans are guaranteed based on your personal credit history. This means that by looking at your credit score, the lender can decide if they'll be able to lend you the amount of money you want. Small business loans, on the other hand, can look at your personal credit score as well as your business credit score. So, if you have a poor business credit score but a good personal score, the business loan might be more difficult to get than if you have a good credit score when applying for a personal loan.
Personal loans can be used for nearly anything unless the lender specifies otherwise. A personal loan finance company usually asks why you're applying but won't generally restrict you to only spending money on your intended use. Business loans tend to have more restrictions and require that you use the money for business-related purchases.
Are Personal Loans Applicable to Businesses?
If you qualify, you can use a personal loan for business purposes. Personal loans have a few benefits, such as being faster to obtain than other types of funding for businesses. They don't require collateral in most cases, and you usually pay them back in two to five years.
If you want to use a personal loan for your business needs, make sure you talk to your lender first. Ask them if they prohibit loans being used in this way before you apply.
How Does Your Credit History Affect Personal Loan Approval?
Your credit history says what you do or don't do when it comes to paying back what you owe. If you have a history of making payments on time, no history of bankruptcy and no issues, then getting a personal loan should be simple.
On the other hand, if you have regularly missed payments, gone to court over debts or have a generally low credit score, getting a personal loan is going to be more difficult.
Your credit score shows you're responsible with the money you borrow. The higher the score, the more likely the lender is to provide you with a loan. If you do qualify for a loan, don't spend more on your credit cards or run many hard inquiries until the loan is approved. Doing those things could decrease your score and cause you to no longer qualify for the loan.
Can You Get a Personal Loan If You Have Bad Credit?
It may be possible to get a personal loan if you have bad credit, but it's not always easy. If your credit score is under 600, getting any kind of credit can be extremely difficult.
The good news is you can get a loan, but you'll actually have to do some research to get one and find out which lenders are interested in dealing with borrowers at high risk. While you look for that lender, take the time to try to improve your score. Pay off debts; continue making payments on time, and check for any errors that might be negatively impacting your credit score. Don't make any unnecessary credit inquiries, and report any suspicious credit activity.
The next step is to talk to your bank or credit union. Ask them what their minimum credit score requirements are and discuss your situation. Many credit unions are more flexible with lending than others, so they can discuss your options with you.
If you have poor credit, then the lender may ask for collateral. Secured loans use personal property as collateral. Lenders may take the collateral you use, such as your home or car, if you don't make payments on time.
What Is a Cosigner, and Do You Need One?
If your credit is poor or fair, or if the lender doesn't believe that you have enough income to pay them back, they may ask you to have a cosigner apply for the loan with you. This loan can be considered a guarantor loan because it's a type of loan that requires a guarantor to cosign on your behalf.
When you have someone else sign your loan, it must be taken seriously. If you default, miss payments or stop paying completely, they'll be asked to pay what you owe.
When someone cosigns a loan, you may be able to take out more money or get a better interest rate thanks to their good credit score. Remember, though, if you need a cosigner, the lender thinks that there's something in your record that makes you a high-risk borrower.
If you can borrow the money you need at a fair interest rate without a guarantor, it's better to do so. However, if you have a trusted family member or friend who's willing to sign, it may help you get the loan you need.
Ready to Fund Your Plans?
How do I get a personal loan? Where can I find small personal loans near me? Can I get a personal loan for small business expenses?
These are common questions we hear at Lendzi, and we're here to help. If you're looking at consolidating debt, want to go to school, need a car or just want some extra money for household projects, then a personal loan could be a good option for you. Once you decide that receiving a traditional or online personal loan is something that you're interested in doing, finding the right lender is the next step.
At Lendzi, we'll help you choose the lender with the right interest rates and offers, so you can get the money you need quickly. Contact ustoday so we can make your vision a reality with funds from one of the best personal loan companies.