If you need extra cash, getting a personal loan may be a smart option. However, as with any type of borrowing, there are a few things to consider before you apply.
While personal loans make sense for many reasons, applying is a big decision that has implications in terms of interest charges, your credit, and more. Here’s what to know before you apply for a personal loan.
How Personal Loans Work
Personal loans are a type of credit that borrowers can take out for a variety of personal needs. These installment loans work by borrowing fixed amounts you pay back monthly, along with additional interest charges, over the life of the loan.
All personal loans come with terms, including repayment terms, or how many months you have to repay the loan, the interest rate, and your monthly payment.
While loan amounts vary depending on where you get your personal loan, at T&I Credit Union, we offer personal loans up to $10,000. The larger your loan, the longer your loan terms will be, and the more you’ll pay in interest.
To determine whether you’re eligible for a personal loan, T&I Credit Union checks your credit report and income to see if you can afford the loan. To borrow money, the borrower typically needs good credit, with a score of 610 or above. Of course, the higher your credit score, the better interest rates you’ll get.
Taking out a personal loan makes financial sense for a variety of reasons, including consolidating debt, making home improvements or repairs, and other big life events like a wedding. Taking out a personal loan can even help improve your credit score.
If you have a credit report that shows you primarily have credit card debt, getting a personal loan may help your credit mix, which can ultimately improve your credit score. For this loan to positively affect your credit, you must make on-time payments since late or missed payments negatively affect your score.
Types of Personal Loans
There are two types of personal loans: unsecured and secured.
With an unsecured personal loan, your lender determines if you qualify based on your financial history and credit standing. This is the most common type of personal loan. If you don’t qualify for an unsecured personal loan or want something with a lower interest rate, you may wish to consider a secured loan backed by collateral.
While not as common, some lenders offer secured loans backed by savings accounts or a certificate of deposit. The risk of getting a secured loan is that if you cannot make monthly payments on the loan, your lender may claim your assets as loan payment.
Where to Get a Personal Loan
While a bank might be the first financial institution you consider when looking to take out a personal loan, credit unions, online lenders, and other types of lenders also offer personal loans. One benefit of getting your personal loan through a credit union like T&I Credit Union is that you can pre-qualify before you apply.
When you pre-qualify for a personal loan, you can see estimated rates without it resulting in a hard inquiry on your credit, which means your credit score won’t go down in the process. You’ll simply have to provide basic personal information, such as your employment status, annual income, social security number, the amount you are requesting to borrow, and your reason for taking out the loan.
This is a great way to compare personal loan options to find the best rate and terms before committing.
When to Get a Personal Loan
While other lending options and financial products are available outside of personal loans, taking out a personal loan may make the most financial sense in some circumstances.
If you have accumulated high-interest debt, like credit card debt, a personal loan is a great way to consolidate it into one payment with lower interest rates. This way, you can pay off your debt faster. An alternative might be to do a balance transfer to a 0% or low-interest credit card, assuming you can pay it off before the interest rate increases. If you aren’t able to pay it off in time, you’ll face late payments, interest charges, and your credit score will suffer.
Another example of when a personal loan may be preferable to other types of lending options is when you’re making home improvements. If you’re making renovations to your home that adds to its value, using an unsecured personal loan to borrow money rather than a home equity loan means you won’t have to pledge your house as an asset in the process.
Major Life Event
While it’s best practice to save for major life events such as weddings or big milestones, personal loans are typically less expensive than funding big events with high-interest credit cards. If you’re strapped for cash, a personal loan might be the right type of loan for you.
However, a personal loan is not the most prudent option when paying off student loans. While you can repay student debt with a personal loan, you’ll likely face larger loan payments. You’ll also lose the opportunity to defer payments, making flexible payments, and other benefits included in your original loan.
How to Get a Personal Loan with Bad Credit
Some lenders serve borrowers with poor credit. When you apply for a personal loan with lenders like credit unions, they take other factors into considerations, such as your income, education, and what area you live in. As always, it’s best to compare rates to ensure you’re getting the best possible deal.
As with any loan, you should always shop around to find the best rates and terms. Interest rates and lender fees can impact how much you pay in the long-term, so doing your research to find the lowest interest rate, minimal origination fees, and personal loans with no repayment penalties will benefit you down the road.
Keep in mind that some lenders may require you to be an existing customer before you can apply for a personal loan, so you may need to establish checking accounts with them before you can apply. Lenders like T&I Credit Union offer checking account rewards, helping you earn up to 1% interest every month.
Lastly, personal loans and other financial products can be complicated and difficult to understand. When shopping around, look for advertiser disclosures on lenders’ sites to ensure you are making informed decisions.
Apply For a Personal Loan Today
If you need help financing a major expense or want to invest in yourself, a personal loan can help. To borrow money to pay off debt, improve your home, and more, call T&I Credit Union at (248) 397-9456 to learn what offerings are available to you.