If you need to make a large one-time purchase or consolidate your debt, taking out a personal loan may be a smart decision. Personal loans can be a good option for budget-conscious individuals who need access to money in a secure, fixed format.
When you’re thinking about taking out a personal loan, you’ll want to know exactly what a personal loan is, the benefits of a personal loan, and how to qualify for a personal loan.
What is a Personal Loan?
A personal loan is a fixed amount of money that you borrow from a financial institution. These can include credit unions, online lenders, or banks. Most personal loans are unsecured. This means that no collateral is required to borrow the money. Personal loans have structured repayment terms, meaning that when you take out a personal loan, you will pay it back in a fixed period, usually between 24 months to 7 years, in a fixed monthly payment amount.
In addition to unsecured personal loans, you may opt for a secured loan instead. Secured personal loans offer even lower interest rates because there is collateral put up for the loan.
What Are Personal Loans Used For?
Personal loans are a good solution for situations that require a big chunk of money upfront. The following are common reasons for borrowing money on a personal loan.
Home Remodel
Home improvements are one reason people take out personal loans. You may want to remodel your kitchen but lack the funds upfront to do so. Taking out a low-interest personal loan could be a good option for a project that will add value to your home and possibly bring in more profit if you decide to sell later on.
Debt Consolidation
Debt consolidation is another major reason people take out personal lines of credit. Credit cards often have rates and terms that are meant to trap you into paying high-interest rates. This means you never make a dent in your credit card balance. By using a personal loan with low-interest rates to pay off your credit cards, you can start paying down your debt.
Tuition
Although student loans often carry low-interest rates, personal loans are also a good choice to take care of tuition for college or certification courses. One of the main reasons you might choose a personal loan to pay for school is if you are concerned with the long-term repayment of federal loans. A personal loan’s terms mean it will be paid off more quickly, clearing your student debt earlier.
Unexpected Bills
If you receive unexpected bills that need to be paid, a personal loan may be a smart option. It is far better to take out a structured, low-interest loan than to let the bills go unpaid and create bad credit on your credit check. A personal loan is also preferable to predatory solutions like payday loans, which can cost you hundreds of extra dollars if you don’t follow their guidelines.
One-Time “Big” Purchases
Personal loans are also used for one-time expensive purchases such as cars or home appliances. Rather than applying for a store credit card or car loan, a personal loan can offer you a lower interest rate and fixed repayment plan on these types of purchases.
Benefits of a Personal Loan
Taking out a personal loan has many benefits, especially compared to other financial solutions that people often think of first.
On average, personal loans have lower interest rates than credit cards. Many credit cards lock customers in at APR rates of over 17%, whereas personal loans can start at as low as 4% interest.
In the case of home improvements, taking out a personal loan is a much simpler process than refinancing to tap into a home equity line of credit. Refinancing includes home appraisals and inspections; having your personal application processed only requires bringing in your financial documents.
Another major benefit of a personal loan over other types of financing is the secure, fixed repayment plan that a personal loan offers. There are no surprises with a personal loan. You agree to an interest rate, a monthly loan payment amount, and a loan term. These do not change over the life of the loan, which means you can easily plan for them in your household budget.
Is a Personal Loan Right for You?
If you are considering a personal loan, you may want to ask yourself a few questions before proceeding with an application. As you look through these questions, consider if a personal loan is right for you and your situation.
Are You Budget Conscious?
A personal loan can be a good choice for you if you are budget conscious. Personal loans are structured, which is great for someone who has a good payment history and responsibly plans where their money goes each month. These loans are meant to assist you with money you can afford to spend but do not have access to in a lump sum. If you struggle with budgeting month-to-month or miss payments on existing lines of credit, a personal loan may not be the right choice for you.
Can You Afford the Loan?
As with any loan, there are fees involved in taking out a personal line of credit. You need to figure out if you can afford the origination fee, as well as the actual repayment of the loan. Shopping around and comparing rates is a smart idea when deciding what is available to you. Plug these numbers into your budget and make sure you can afford to take out the loan.
What is Your FICO Score?
To take out a personal loan, you’ll need to know your credit score. Excellent credit heightens your chances for loan approval and lowers interest rates. However, if you struggle with bad credit, there are ways to improve your score in preparation for taking out a personal loan.
How to Qualify for a Personal Loan?
Once you’ve decided a personal loan is right for you, you may be wondering how to qualify. One requirement is that you have proof of employment and a low debt-to-income ratio.
However, your ability to qualify for a personal loan is most affected by your credit score. If your score is lower than 600, many financial institutions will only approve you if you put down collateral. You might also be stuck with a higher interest rate. In some cases, banks and credit unions will list a minimum credit score on their website. This cut-off is often in the upper 600s.
Improving your credit score is extremely important if you want to qualify for a personal loan. You can improve your credit score in a number of ways.
1. Know Your Credit Score
Start improving your credit score by knowing your credit score. This will give you a good idea of how far you need to go to be approved for a personal loan or if you are ready to borrow with your credit score as is. You may have to pay a small fee to get your actual credit score; however, it is worth the money to find out where you stand.
2. Look Over Your Credit History
Pull your credit report and verify all of your information is accurate. You can use one of the three credit bureaus, Transunion, Equifax, or Experian, to get a copy. Legally you are entitled to one free credit report per year, so if you haven’t pulled yours already, this shouldn’t cost any extra money. Dispute any inaccurate information you discover so that you can have it removed from the report.
3. Make Payments on Time
If you’ve struggled with making payments on your credit accounts, now is the time to get everything in order. Make a budget and plan your bills so that your history isn’t spotted with delinquent or missed payments. This is one of the first things lenders look for, so making sure your payment history is good.
4. Lower Your Debt-to-Income Ratio
Banks will want to know that you make more money than you borrow. If you have a high debt-to-income ratio, you must work to pay off some of your larger balances. This will show a potential lender that you make more money than you spend, making it more likely they will trust you with their loan.
5. Don’t Open New Accounts and Leave Old Accounts Open
To improve your credit, do not apply for any additional loans or credit cards. These “ding” your credit score, which makes lenders less willing to lend. Also, leave older accounts open even if they are paid off. They show a long credit history and lower your debt-to-income ratio.
Start Your Personal Loan Application
Applying for a personal loan is easy with T&I Credit Union. You can explore our website and browse our blog for in-depth articles about personal loans. Speak to a loan manager at (248) 397-9456 to find out about their rates and requirements for taking out a personal loan.
