Every year, millions of people procure personal loans to pay for unexpected expenses, consolidate debt, remodel their house and more. 

Why are personal loans appealing to so many? When someone is in pinch and money is tight, a personal loan can help! 

Personal loans not only offer low-interest rates for consumers with good credit score, but they are also smaller loan amounts than traditional types of loan. This doesn’t mean that they are the best solution for everyone. 

If you are thinking of getting a fast loan online in the form of personal loan, here are a few things to consider before you make your decision.

How personal loans work

Personal loans are a sort of instalment loan. This means you borrow money from the lender and repay with interest in monthly instalments till the repayment date.

Once you have repaid the total amount, the lender closes your account. If you need more money, you have to apply for another loan. It’s that simple!

Types of Personal Loans

  • Unsecured Loans- Don’t let the name fool you. Personal loans go far beyond a family member or friend lending you cash. Unsecured personal loans are not backed by collateral.

    Online lenders and credit unions decide whether you qualify based on your credit score and financial history. If you are not eligible for an unsecured loan, some lenders also offer secured options.

  • Secured Loans- Secured loans work like traditional loans. They are backed by collateral. If you are unable to make your payments, your lender has full right to claim your asset.

Where can you get a personal loan

Most of the people go to banks when they have to acquire a loan. But personal loans are offered by many other lenders than the bank.

Consumer finance companies, credit unions, peer-to-peer lenders, online lenders also offer loans to eligible applicants.

TIP: Since the entire process is carried online, there is a risk of being scammed. Before sharing any information with internet lenders, you should make sure that the lender has all the necessary accreditation.

Impact On Your Credit Score

People with excellent credit and a steady job can usually borrow a good amount of cash with a personal loan. But when you apply for a loan, the lender performs a hard inquiry. This means that the lender will pull your credit as part of the application process, which will lower your scores by a few points.

Personal Loans VS. Other Lending Options

While a personal loan can be the thing that saves you from financial disaster, it might not be best for everyone. They can save you a lot of money if you are currently trapped in a debt cycle. But, since they are usually unsecured, interest rates are higher than collateral, secured loans. Therefore, before e-signing the contract, make sure you have calculated all the cost associated with the loan, not just the interest rate, to determine the total money you will have to repay.

If you have a good credit score, you might qualify for a balance transfer credit card with a 0 % introductory annual percentage rate. If you think you are capable of paying off the balance before the interest rate hikes up, you must go for a credit card. 

But, beware, if you can’t pay your balance, you may end up in a lot of debt.

There are other types of loans too. A home equity loan (HEL) is a good option for homeowners. HELs are generally instalment loans that provide the financing you need at low rates. 

Be aware:  If you default, your house becomes the collateral, and the lender can foreclose on your home.

Takeaway

While a personal loan is a good option in case of financial emergencies, there are many factors you must keep in mind before considering what type of credit is best for your situation.