Applying for a personal loan can be an important financial step when done right. With relatively low interest rates and easy approval processes, personal loans can help you improve your financial situation. However, as with any other form of debt, you should be careful when applying for it. If you mismanage your loans, you could end up making your situation worse.
Applying for a personal loan is easy. However, before you choose to apply, there are a few things you should keep in mind. Here are 4 characteristics of personal loans that you should be aware of when applying for them.
Qualifying is easy
Most financial institutions place lower eligibility barriers on personal loans than on other forms of debt. So, you will find that these loans have quick approvals and less application restrictions. Their interest rates also tend to be lower than those on comparable debt.
For example, the interest rates on personal loans are much lower than what you will find on credit card debt. With these relatively low interest rates, personal loans are a great way to reduce your interest charge by replacing high interest debt with a lower rate. Typically, banks set interest rates and terms to help you pay off debt within 7 years (84 months).
Interest rates are generally fixed, unlike mortgages which can have variable rates. These fixed rates mean your monthly payment is predictable and you can easily budget for it. In many cases, lenders do not charge prepayment or prepayment penalties, which is common with other forms of debt. In addition, you can apply for and benefit from a personal loan even if you have other forms of unpaid debt with your bank or financial institution.
All in all, with quick and easy approvals, personal loans offer a great basket of features if you are looking to consolidate or reduce your debt load.
Ask what you can afford
While the approvals are straightforward, that doesn’t mean that personal loans don’t come with pitfalls that can worsen your personal financial situation. It is still a form of debt, and you need to plan carefully how you will use the money and what your monthly interest payments will look like.
You don’t need a credit score or a perfect credit score to apply, but defaulting on your personal loan will certainly worsen your rating. It is better to look at your current monthly debt payments and replace them with your personal loan payments.
The more you borrow, the higher the interest rate will be. Always keep your financial goals in mind before applying for a loan and stick to your plan.
Use it for business financing
Personal loans are not just used to write off personal debts. They can also provide an influx of capital for your small business or startup. Many entrepreneurs prefer to use personal loans as start-up capital because most new businesses do not qualify for bank financing.
Even small established businesses face significant hurdles in obtaining financing, with banks demanding high capital reserves and unrealistic income records at the limit. Many small business loans do not have a lump sum. Instead, the product is released periodically after you provide invoices and other documents.
So, personal loans offer business owners a great way to finance their ideas and get started. Most personal loans do not require collateral to secure the loan, which makes them an even better choice. You will receive a lump sum that you can use however you see fit. However, there are some downsides to using personal loans for business purposes.
First, your business credit rating doesn’t improve when you use a personal loan. After all, the debt resides in your name, not your business ”. Second, although small business loans are difficult to apply and obtain, they provide larger sums for business use. So, if your financing needs are high, a personal loan is not the best choice.
For almost all other purposes however, personal loans are a great choice.
Buy the best conditions
These days, online lenders have taken a significant share of the personal loan market from traditional banks. Consumers benefited tremendously from this decision as online lenders use many other credit scoring models beyond the outdated credit scoring rubric.
Online lenders can offer more flexible terms and even allow you to call on funds. Platforms like Prosper offer a range of options for people looking to raise funds for any purpose. Interest rates are set on the basis of proprietary credit models. You shouldn’t expect miracles from these lenders, however, they can potentially offer much better terms than traditional banks.
Qualification is straightforward and approvals typically take around 48 hours or less. Defaulting on these loans will affect your credit score, so don’t think of these funds as free money.
A great financing option
Personal loans are just one of the many financing options available, but they are best for certain purposes. If your goal is to reduce your debt load and borrow relatively small amounts of money, personal loans are your best bet. Remember to review the loan terms and you will succeed in improving your financial situation immeasurably.