A Personal Loan is an unsecured or secured loan to meet your current financial needs. Unsecured loan means there is no collateral held against it. Secured loans mean there is collateral held against it. It is usually taken by borrowers who are looking for quick and easy loan with manageable interest rates and minimum documentation. You can use a personal loan at your convenience without being monitored for the actual end usage.
How do you obtain a Personal Loan?
To apply for a personal loan, here are the documents you’ll typically need to provide:
- Identification – passport, driver’s license, state ID or Social Security card
- Verification of address – utility bills, recent mail or copy of lease
- Proof of past income – W-2 forms, pay stubs, bank statements or tax returns
You may also be asked for this information:
- Social Security number
- Monthly debt obligations (rent, student loans, etc.)
- Gross income
- Employer’s name, work address and phone number
- Address, email, phone number
- Previous addresses
- Date of birth
- Mother’s maiden name
- College name and major
After providing this information, you’ll need to specify the amount of money you want to borrow and some lenders may ask you to choose how much time you need to repay it (typically two to five years). Keep in mind that the longer you pay back your loan, the more you’ll have to shell out for interest payments. If you borrow only what you need, you can keep your costs low.
What Are the Pitfalls and Problems Obtaining Personal Loans?
Accepting the First Loan Offered – Loan terms aren’t set in stone, so you may not want to just accept the first loan offered to you. Instead, do these two things to help ensure you receive favorable terms:
Shop around. It’s great if you get approved at the first bank you walk into, but that doesn’t mean they’re offering the best possible terms. Obtaining a personal loan is a major financial commitment, so consider looking at your options before making your decision. Just be aware that if you apply for multiple loans within a short period of time, these inquiries will show on your credit report – however, they will typically count as one inquiry if they’re made in a short period of time.
Negotiate loan terms. There’s no rule requiring you to accept the loan terms you’re offered without a little pushback. That said, lenders aren’t obligated to negotiate or change their terms for you, either. Make sure you have a clear idea of what loan terms are acceptable to you–such as length of the loan and the monthly payment amount–so you can go into negotiations with a game plan.
Ignoring Credit Eligibility Requirements – A credit check is typically a standard part of the loan approval process. There are hard and soft credit inquiries: A hard inquiry generally occurs when a creditor (such as a bank or credit card issuer) checks your credit report in order to make a lending decision.
A soft inquiry generally occurs when you check your own credit or when another person or company checks your report for the purpose of credit pre-approval or as a background check.
With every hard inquiry, your credit score may go down by a few points. Do this too often over an extended period of time and your credit score may take a significant hit. Hard inquiries may remain on your credit report for two years.
Overlooking the Fine Print – Before signing your loan agreement, make sure you understand every detail of your loan. While you should read all the fine print thoroughly, the following two things can be particularly important to know:
Interest rate and loan duration. Both the interest rate of your loan and how that interest is calculated are important pieces of information to know. Interest generally compounds for the duration of your loan, so the longer the loan, the more you’re going to pay in interest. Paying off $10,000 over five years may give you low monthly payments, but you’ll typically pay more in interest than if you pay off the same amount over one or two years.
Fees and penalties. “The biggest personal loan mistake consumers make is not paying attention to all of the fees,” says Roshawnna Novellus, president of Novellus Financial. For example, origination fees (a fee that your lender may charge to cover the cost of processing the loan) may usually be tacked onto the principal of the loan, and can be up to 5 percent of the loan amount. And an exit fee–or pre-payment penalty–is often charged if you pay the loan off early; the amount may vary depending on the amount of your loan. So before you sign on the dotted line, read through the agreement carefully.
Borrowing More Than You Can Afford – It can be tempting to take the most amount of money possible on a personal loan. However, even if you can afford the payments today, your financial situation could change at a moment’s notice and those payments could come back to haunt you. Interest builds up over time resulting in increased payments, which could wreck your finances if you come up against difficult times.
One way to avoid this is to decide on an exact number for your loan before you go into negotiations. If you only have a vague idea of how much money you want to borrow, the loan officer may try to convince you to raise the amount of the loan. Having a clear, reasonable amount in your head can help you avoid accepting money that you may have trouble paying back.
What Are the Benefits of Personal Loans?
You should note that some personal loans don’t require collateral, it comes with a number of other benefits. Here are some of the most important ones.
Quick Availability – Personal loans are perfect for emergencies because they are usually processed quickly – sometimes within 24 hours. This means you can easily obtain funds for expenses that require immediate payment, such as medical bills.
Personal loans can be accessed quickly because they require minimal paperwork and protocol. Just approach your lender and fill some forms, and you’ll have the funds released to you after a few days, at most, provided you meet the lender’s conditions.
Flexibility – Unlike home loans, auto loans, or business loans, which all can only be used for specific purposes, Personal Loans can be used for anything you want, usually no questions asked.
In the case of personal loans, your lender is less interested in what you intend using the funds for. What they’re interested in, is your capability of repaying the loan at the determined due date. So people take personal loans for many different reasons, some of them are marriages, medical treatment, business, vacation, or to pay education fees.
Lower Interest Rates – When compared with other loan types, personal loans attract relatively lower interest rates, which are usually fixed. As a result, there is stiff competition among lenders to attract customers by offering lower interest rates that are even sometimes negotiable.
Loan companies also assess your risk in terms of default, which means they base the charged your interest rate on your ability to repay the loan amount in the future. Thus, if you have a high-income job, no other loans in place, and have a long-lasting working relationship, you will have no problems in getting the best interest rates possible.
Planned Repayment – Most personal loans are fixed-term loans. That is, they offer the same interest rate and repayments throughout the term of the loan. This will help you to know beforehand when exactly you will finish paying up the loan.
Whether it’s for your child’s education, a long-planned home renovation, that dream business or simply an unexpected event, getting a Personal Loan is an affordable and easy way to get the extra cash to meet your needs.
What Can a Personal Loan Be Used For?
Personal loans can be used for almost any purpose, such as a car purchase, wedding or consolidation of other credit commitments.
They cannot be used for:
- Business or investment purposes
- Bridging loans
- Mortgage deposits
- Speculative reasons
- Purchasing or retaining an interest in land