What is a personal loan?
A personal loan doesn't require collateral and can be used for many purposes.
The benefits of a personal loan
A personal loan is a smart way to secure funds for your financial goals, whether you’re looking to consolidate debt or handle major expenses. Making timely payments—or even paying off your loan early—can boost your credit score.
The two basic types of personal loans
Unsecured Loans
- Borrow funds for various needs such as debt consolidation
- No collateral required, unlike a house or car
- Your credit history influences loan approval decisions
Examples include student loans, credit cards, and personal loans.
Secured Loans
- Collateral such as assets is required, often matching or exceeding the loan amount
- Failure to repay may result in loss of the collateral
- Common collateral includes homes, cars, and cash
Examples include mortgages, auto loans, home equity loans, and credit lines.
Understand Your Loan Terms
Interest Rates
Borrowing money comes with a cost called interest, which you pay to the lender as part of your monthly payments. A personal loan with a low, fixed interest rate can help you achieve your financial goals.
Loan Term
Personal loans give you the flexibility to choose a repayment period that fits your budget. They are designed to help you consolidate and pay off debts within a clear timeframe.
Lenders and Fees
Make sure to choose a reputable lender and carefully review any fees, such as origination fees, closing costs, or prepayment penalties.
Underwriting
Underwriting is the process lenders use to assess the risk of lending to you. This involves reviewing your credit history and evaluating the likelihood of repayment.
What to consider before you apply
Your Credit Score
A strong credit score can help you qualify for a lower interest rate because it reflects your creditworthiness and ability to repay the loan. On the other hand, a lower credit score may make it more challenging to secure a loan. Remember, taking out a personal loan is a serious financial commitment that requires careful attention and responsible management. Missing payments or defaulting on the loan can negatively impact your credit profile and financial health.
You Can Have Multiple Loans
Having an existing loan doesn’t prevent you from applying for another. In fact, some personal loans are specifically designed to help you pay off or consolidate other debts.
Using a personal loan for debt consolidation is a smart strategy that allows you to combine multiple debts into one manageable and potentially more affordable payment.