A personal loan is a type of credit you can use for a variety of purposes. It operates as an installment loan, meaning that you borrow a sum of money from the lender and pay it back over a set period of time. The repayment period is typically anywhere from one to seven years, and your monthly payment will include both principal (the amount of money you borrowed) and interest charges. The lender will report your payment activity to the credit bureaus each month, and whether you pay on time or not can have a positive or negative impact on your credit score.
Many lenders offer a wide variety of personal loan products, and it’s important to do your research to find the right one for you. The best personal loans often feature competitive interest rates and loan terms that match your budget needs. Before making a final decision, it’s helpful to use an online personal loan calculator to compare the total costs of different options. It will help you spot any hidden fees or unfavorable conditions that may impact your long-term financial well-being.
In most cases, you’ll need to submit an application form and supply basic information like your name, address and income before being approved for a personal loan. Some lenders also ask for more detailed financial information, such as a bank statement or tax return. The lender will review your application and credit report before determining if you’re qualified for a personal loan, and if so, what the specific terms of the loan will be.
You’ll typically be able to choose from secured and unsecured personal loans. Secured personal loans require that you put up some type of collateral, such as a car or boat, to qualify for the loan. The lender has the right to repossess or sell that item if you fail to make payments on time.
The most common uses for a personal loan involve acquiring a new home or vehicle or making large purchases. Another popular use is debt consolidation, where the borrower takes out a personal loan to pay off high-interest credit card debt and obtain a lower, more manageable monthly payment. Finally, consumers with a pricey event on the horizon — such as a wedding, vacation or medical treatment — might take out a personal loan to cover expenses.
Once your application is approved, the lender will distribute funds to you, which could arrive in the form of a direct deposit into your account or a check. You’ll then start repaying the loan in accordance with the terms specified by your lender, which will be outlined in your promissory note.
While it’s possible to get a personal loan with bad credit, the process is much more challenging and you may end up paying more in the long run. Lenders view borrowers with poor credit as a higher risk and generally charge them higher interest rates than those with excellent credit scores. It’s therefore vital that you work on improving your credit score before applying for a personal loan, so you can get the most competitive rate and lowest costs.