What Is A Personal Loan And How Does It Work?

If you can not afford your expenses with your current financial situation or if you need a big amount of money to purchase something you want or close your budget gap, you may need to borrow some money from a reliable source.

What Is A Personal Loan?

Personal Loan means borrowing money from a bank, credit union or a private lender to pay back in fixed monthly payments or installments within 2 or 5 years. Most personal loans are unsecured which means they are not backed by security.

Interest rates of unsecured personal loans usually range from 6% to 36% due to your credit score, credit record and debt-to-income ratio. Thus, if you improve your credit score before applying for a loan by paying off your previous debts and overdue bills, you may increase your chance of getting a loan with a lower interest rate.

Secured And Co-signer Personal Loans

If you do not qualify for an unsecured personal loan due to your weak credit score, you may consider applying for secured personal loans or co-signer loans.

To receive a secured personal loan, you have to offer up an asset as collateral. You should be prepared to lose the asset if you default. Although it makes the situation more risky for the borrower, it is a good way to get an affordable interest rate. As another option, you may ask someone with a better credit score to act as a co-signer to receive more reasonable interest rates.

How Does It Work?

Lenders decide whether you can get a personal loan due to your credit history. To get a personal loan without a co-signer or pledging your asset, you should have an excellent or good credit score, if you do not want to face high interest rates. A fixed-rate agreement would help you to avoid unwanted surprises.

In addition, since credit unions are not-for-profit entities, they may charge lower interest rates compared to the banks. You may start with checking your credit history to see if you qualify for a personal loan. Then, you should compare multiple lenders to get the most affordable rate.

Either in person or online applications, the lender will want to see your annual income, debt-to-income ratio, monthly housing payment, employment and your employer’s info.