When used correctly, a personal loan is a useful financial tool with many potential uses. If you have high-interest debt, such as previous loans or balances on your credit cards, consolidating that debt by paying it with a personal loan can save you money.
You could use a personal loan to expand your business, improve your home or finance a large purchase that you don’t have the cash to pay for upfront. Have you just been hit with a large, unexpected bill, such as a car repair or medical expenses? A personal loan can cover that.
Choosing Between a Personal Loan and Your Credit Card
Debating whether you should get a personal loan or just use your credit card? A loan offers a couple key advantages.
First and foremost, personal loans tend to have lower interest rates than credit cards. With a loan, you make installment payments over a predetermined period of time. As long as you make these payments, you’ll pay off the loan at the end of the term. Credit cards have minimum payments, and if you just pay your minimum, you could be paying yours off for decades.
Let’s say you need $15,000. Borrow a personal loan for that amount with a 36-month term and a 15.742-percent annual percentage yield (APR), and you’ll pay it off in 36 months after paying $3,064.96 in interest. On the other hand, if you put $15,000 on a credit card with a 17.99-percent APR and make the minimum payments, you’ll pay it off in 253 months after paying $14,581.65 in interest. That’s over two decades compared to just three years.
How Personal Loans Work
Loans are either secured or unsecured, with the difference being that the former has collateral attached and the latter doesn’t. A personal loan is unsecured so you don’t need to put up any of your property as collateral.
Wondering how much you can borrow? This depends on your financial situation, but personal loans are available for up to $35,000, and the best part is that you may be able to get your money within one business day.
You’ll pay off your loan over monthly installments, and payments will be equal instead of ballooning towards the end of the term.
Applying for a Personal Loan Online
It’s easier than ever to apply for a personal loan. You’ll start by filling out a short questionnaire with some basic information. This usually takes less than a minute.
Next, you’ll select the type of loan you want, including the amount of money you need and the term length you’re interested in.
After that, you’ll need to log in to your bank account online. This is to provide the lender with read-only access to your account so they can check your financial information.
The final step is confirming the transaction. You’ll choose where you want the lender to deposit your personal loan, and then e-sign the loan agreement.
Personal Loan Terms
It’s smart to understand how personal loans work before borrowing one.
The amount you’re borrowing is the loan principal. However, personal loans also include an origination fee, which typically ranges between 1 and 6 percent of that loan principal. The lender deducts the origination fee when issuing your loan.
For example, you borrow $5,000 with a 2-percent origination fee. 2 percent of $5,000 is $100, which means the lender will deposit $4,900 into the account you select.
The term is the length of the loan. This is almost always 12 months or more, and the standard term length is between 36 and 60 months.
The interest rate is the percentage of the loan principal that the lender charges in interest. A fixed interest rate means it stays the same over the lifespan of the loan. The APR is the percentage you pay annually after combining the interest with any lender fees.
Whatever you need financing for, a personal loan may be the solution. Run the numbers to determine how much you’d pay for a personal loan compared with your other financing options, and you’ll likely find that a personal loan is the most inexpensive option.