Getting a loan is an easy way to borrow money when you need funds for something you currently cannot afford like your other debts, a car, or an event.
Although sometimes getting a bad rap, loans do not have to be avoided entirely. In fact, loans can be beneficial for your financial management if done right.
There are several types of loans available for different types of situations, but one of the most common and the most flexible loans is a personal loan. In fact, according to reports, in the first quarter of 2022 alone, 20.4 million Americans have a personal loan. That is 24% more than the numbers in 2021.
What is a personal loan and how does it work?
A personal loan is a type of loan that allows you to borrow a lump sum of money that you can use for any purpose. You can use it for debt management, vacation trips, or milestone events like weddings, birthdays, and etc.
Personal loan amounts can range anywhere from $1k to $100k, depending on your lender and your eligibility. Unlike other huge loans, personal loans are mostly “unsecured”. This means you can borrow money without putting down a collateral.
Application requirements may vary from lender to lender, but they typically consist of your proof of income, credit score, and proof that you are a good payer.
Repayment terms also vary, and they depend on your agreement with your lender. Your repayment terms are often influenced by the amount borrowed and your ability to pay it back. Some personal loans can be paid monthly within 1 year, while others can stretch to 7 or 10 years.
If you need financial help and are considering taking out a loan, reach out to a trusted lender like Smarter Capital Group to discuss if you are eligible for a personal loan.
What are the different types of personal loan?
Most of the personal loans lenders offered are “unsecured”. This simply means that you can apply for a loan even without putting down a collateral (usually a house or a car in your name). Since lenders are risking more by lending money to borrowers without accepting any collaterals, unsecured loans tend to charge higher interest rates than secured loans.
Unlike unsecured personal loans, secured loans need collateral, which is usually a house (for mortgages) or cars (for auto loans). This guarantees the lender that you will pay them back. When you fail to pay your personal loan, the lender can then seize your collateral as compensation.
Since secured loans are less risky for lenders, interest rates are a little bit lower here.
Revolving credit, also called an open-end credit, is a common form of personal loan where borrowers are allowed a specific credit limit that they can access any time. Credit cards are a popular type of revolving credit where you can borrow any amount under your credit limit and pay only for the amount you take out.
Installment loans are basically the type of loan that you repay at a regular schedule. Like other personal loans, installment loans come with a fixed interest rate so you pay the same amount every month.
If you want to pay fixed amounts every month, you might want to check fixed-rate loans. Interest rates in these types of loans are permanent, and you pay the same amount each time. This makes it easier to manage your budget.
Variable-rate loans are the opposite of fixed-rate loans. This means instead of getting a locked-in interest rate, you will have an interest rate that can change over the entire duration of the loan. While you can expect sudden increases in interest rates, you may also enjoy lowered rates over time. Talk to your lender for more information about this type of personal loan/
Co-signed loans are an option when you cannot qualify for a personal loan on your own. Upon application, a co-signed loan will require a co-signer, or a person who can vouch for you and would promise to pay the loan back if you fail to pay it yourself.
A co-signer with a good credit score will most likely help you get a co-signed loan faster.
Payday loans allow you to borrow smaller amounts of cash — usually between $5 and $1,000. This type of loan is relatively easier to apply for because lenders no longer do a hard credit check on you. All they will ask from you is a valid ID and proof of income.
You will then pay the entire loan amount upon your next paycheck which is in two weeks.
Since payday loans are easier to qualify for and lenders risk not getting paid by reducing the application requirements, payday loans tend to have very high interest rates, sometimes reaching up to 400%.
What are the benefits of a personal loan?
Personal loans are helpful in many cases and can be great options when you need immediate financial help.
Here are some of the advantages of personal loans:
Lower interest rates
Personal loans, in general, have lower interest rates than credit cards. While charges depend on your credit history, fees can run from 4% to 36%. The stronger your credit, the better the chances of qualifying for good personal loan rates.
One lump sum
One of the winning factors of personal loans is your ability as a borrower to access the loan amount in one single transaction. This is very helpful when you’re thinking about using the entire sum of money for something like a big event or purchase.
Fast funding times
It’s relatively easy and fast to apply for a personal loan. This is especially beneficial when you’re trying to get your hands on money for an emergency. As soon as your personal loan is approved, your lender can wire the money to your bank account as soon as the next day, although this still depends on your lending company.
No collateral requirement
Most personal loans are unsecured. This means you no longer have to put down collateral to get your application approved. While this can be risky for the lender, this is more favorable for the borrower since they don’t have to risk their assets (house or car) from getting taken away from them if they fail to pay the loan.
Many loans require you to state what you will use the loaned money for. In personal loans, however, you are free to spend your loan however you want. Whether it’s for a wedding, a big trip, or a payment for another debt, lenders don’t need to ask you where you need the loan for.
Extended loan terms
Personal loan payments can be stretched to 10 years depending on your lender and how much your loan is. This is longer than short-term loans such as payday loans. This is helpful for borrowers who need more time to pay the loan off.
What are the alternatives to personal loans?
Before taking out a personal loan, you can also consider the following alternatives. These can be additional options when you are unable to take out a personal loan or if you choose not to get one.
If you have set aside savings, try tapping into them first before going into debt. This is so you can avoid interest charges that can accumulate over time.
Lines of credit
Lines of credit allow you to borrow money under a specific credit limit. You can choose to borrow an amount lower than your limit and be charged only for how much you took out.
Credit cards are a popular alternative to personal loans. Based on your qualifications and credit history, a credit card company grants you a credit limit that you can access or draw from anytime.
Payday loans are short-term loans that are notorious for their high interest rates. These are generally easy to get because lenders only require an ID and proof of income from the borrower. The loaned amount is then paid the next payday which is practically in two weeks’ time.
Why should you get a personal loan?
Personal loans are a great option for when you need cash for emergency situations!
Here are some other reasons you should consider getting a personal loan:
If you are currently in a high-interest debt or if you are managing multiple debts, a personal loan can help you pay it off so you can just focus on one loan with lower interest rates.
Covering emergency expenses.
Emergencies can happen. Whether they’re medical bills or car repairs, personal loans can help you finance these situations without depleting your savings.
Fixing up your home.
You can also use a personal loan to fund a home improvement project. Fixing up your home can be costly, so extra funds can be incredibly helpful.
Paying for a wedding.
Big events such as weddings can be very expensive. If you can’t afford to cover the expenses for an event, personal loans may come in handy.
Starting a business or funding a project.
Starting a business can also be costly. Since personal loans are flexible and are not fixed on a specific purpose, you can use it to finance a business.
Is a personal loan right for you?
Before taking out a personal loan, explore other options and ask yourself if it is smart for you to take out a personal loan.
Understanding personal loans is vital before you consider applying for one. This is because there are several types of personal loans you can choose from and not everything may match your current needs or situation.
Because there are factors that determine if you are qualified to apply for a personal loan, you should talk to your lender first. Lending companies can help you decide if you should get a personal loan over other types of loans. You can also discuss your options based on your qualifications such as your income, assets, and credit score.
Choosing the Right Lender
When taking out a personal loan, your lender matters. Not all lending companies offer the same rates or require the same documents or qualifications. You also need to choose a lender that is concerned with your financial health and offers the best options for your current situation.
Smarter Capital Group helps you explore the different loan types available for you. We also assist you throughout the entire application process so you get approved right away with the best possible terms. If you want to learn more about getting a personal loan, reach out to Smarter Capital Group now.
Call Smarter Capital today, Toll Free, at (855) 288-5470.