What is a Personal Loan?
A personal loan is money that is borrowed from a financial institution such a bank, credit union or from online lenders to an individual to be paid in fixed instalments over a period of time. The “period of time” can vary between 2 up to 7 years. The payment includes an interest rate, and it varies between 6% and 36% APR. The qualification for this loan is based on your income and credit card history, which is relatively easy compared to other forms such as equipment, home or automobile loans. Personal loans also knew as “signature loans” or “unsecured loans” because in most cases, their no requirement for collateral in order to secure the loan. Personal loans are becoming a very popular financial option for many, and the demand is on the rise. Between 2018 and 2019 for example, the number of personal loans rose from 20.3 million to 22.5 million and the balances reached a record of $156 million. Personal loans are indeed very appealing to consumers, we will discuss how.
- Why Are Personal Loans So Special?
Personal loans do not dictate how the money should be used. The money may be used for virtually anything. This makes the loans very popular for almost anything that needs money – from small home improvements to expensive purchases. The interest rates for personal loans are lower compared with other loan rates on credit cards. For most consumers, the rates are between 6 and 7%. In addition, most loans are unsecured – you don’t have to put up a collateral such as a requirement in a mortgage loan. This makes it appealing to those who do not have much to offer as collateral. The most popular use of personal loans, however, is for debt consolidation. This is the easiest and most convenient way of paying off the higher-interest credit card debt. These loans are quick to obtain, do not demand a perfect credit score and have fixed monthly payments among other merits.
- Where Can You Get a Personal Loan?
Personal loans differ greatly (or slightly) in terms of the terms, fees, and interest. These defining differences set the order of preference for consumers with different lenders. Before applying for a personal loan, consumers will consider many lenders and decide based on those 4 points. While there may be different lenders, they are divided into 3 main categories, we will briefly discuss each
- Online lenders
If you are comfortable with the online approach, this is the quickest, convenient and altogether cheapest way of bagging a personal loan. This seems to be the majority of the population because (according to TransUnion data) online lenders now own the biggest market share (38%) of all unsecured personal loans. With online lenders, you can compare several personal loan rates and terms, make your choice, apply online and receive feedback on the same day right from the comfort of your home or office. Most online lenders use a prequalification process to provide customized rates and terms for you. For you to get your ideal loan rates check out Loanadvisor This is a soft credit check that won’t damage your credit score points. However, upon finalizing your loan, a hard credit check may be performed at the expense of a few points. This is mostly not an issue because most online lenders are open to working with people of lower credit scores compared to other options.
- Banks
Despite online lenders having a bigger market share of unsecured personal loans, banks are still bigger players in the field. Banks have the virtue of being reliable and possess an air of financial stability that consumers find appealing. There are also conservative consumers that aren’t really into the online financial workings, this group still comprise a big chunk of the population. In this option, borrowers need a good credit score (at least 600 points). They offer higher loan amounts than online lenders but generally higher rates. Some banks can discount 0.25% of your personal loan’s annual price interest (APR) for long-time customers.
- Credit Unions
There is a members-only personal loan option offered by particular financial cooperation. That is, before you even consider applying for a personal loan, you first have to be a member. Credit Unions act in the best interest of its members, meaning their loans are member-customized. This presents some advantages over more corporate financial institutions like banks. For instance, Credit Unions may cut its members some slack when it comes to the minimum credit score requirements. Members may still be eligible for a loan application even with a score that is less than 650, which is difficult and sometimes impossible for banks.
There is also the possibility of having lower interest rates than banks. Another decisive advantage for Credit Unions is that they may be able to attend to costumers that may not be acceptable elsewhere due to their history, health and other factors. For example, the Navy Federal Credit Union may offer loans to veterans who due to some factors may not be eligible elsewhere. The downside of Credit Union other than being a members-only financial option, most Credit Unions are non-profit institutions so they do not have plenty of money available for loans. Other Unions require its members to make a small donation to a charity.
What Do Online Lenders Look for in a Borrower?
So far, we have focused our discussion on what borrowers look for in lenders. In this section, we will turn this around and consider the situation from the lender’s perspective. In this segment, we will limit our discussion to online lenders.
- Your Credit History
All online lenders (all lenders for that matter) will look at your credit score and report before approving your loan. In fact, this is the most important part of your loan approval because it entails how you have managed borrowed money. A poor credit score is an indication of default risk and every lender wants to avoid that. Lenders don’t usually disclose their minimum credit scores, but they are usually in the 700s to 800s.
- Your income and Employment history
Lenders are interested to know how you will pay your loan, they will, therefore, require an income and employment history. You should be able to show your last 3 paychecks and at least two years of W-2s. For self-employed individuals, at least 3 months of bank statements and perhaps 2 years of tax returns may be required. Other sources of income are relevant in this category as they will all bolster your chances to convince the lender that you can pay back the loan.
- Personal information
You may be required to provide several personal information such as a copy of your Social Security Card, driver’s license or other state-issued ID. The lender may require that you state where the money will be spent and of course how much money you will need for the loan.
Conclusion
Personal loans offer a great way to obtain cash or manage your debts. Of all the lenders out there, online lenders have the best lending conditions and requirements. Generally, online lenders do not require too much information ahead of loan approval, which makes them popular among many borrowers. The best way to guarantee a loan from an online lender is a perfect credit score. If you have a poor credit score, you may want to hold back on the application and raise your score.
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