In full transparency, personal loans are appealing and valuable. Studies show that millions of consumers use personal loans as way to fund unexpected events, home improvement projects, and consolidate debt.
If you’re considering applying for credit, here are five important things to know about personal loans that could help you decide.
1. How Personal Loans Work
Personal loans are borrowed allowances that you pay back to your lender over time. Once the personal loan lender approves your application, you’re free to use the funding as you wish.
It’s worth noting that terms on most loans typically range between 12 to 84 months; you can expect the account to close once you pay the credit in full. While credit lines can vary, your lender will consider your credit health to determine the final amount of approved funding.
2. Common Reasons To Obtain a Loan
Given their versatility, there’s no real reason consumers may seek assistance from a personal loan. However, you might need a credit line to fund a significant home repair without charging too much on your credit card.
You might also consider a personal loan to help cover medical costs and fund significant life events like a wedding or college. Some consumers seek credit as a way to consolidate debt; by reducing debt, you’ll only worry about one payment instead of multiple accounts.
3. A Loan’s Impact on Your Credit
Applying for a personal loan is like applying for a credit card; it appears as a hard inquiry on future reports.
Hard inquiries typically lower credit scores by several points but will ultimately even out as you comply with payment. Expect hard inquiries to stay on credit reports for up to two years after the initial application.
4. The Two Types of Personal Loans
There are two types of personal loan contracts: unsecured and secured. The main difference between the two is the need for collateral to substantiate repayment security. Unsecured loans primarily focus on your financial history when establishing whether you qualify for a loan.
On the other hand, expect to put up a savings account, CD, or other assets as collateral that your lender can claim in the event of failed repayments.
5. Interest Rates and Fees
Over the life of a personal loan, a borrower can expect to repay their credit with added interest and other fees. Interest rates vary depending on the financial institution and your credit. Some applications come with fees to cover processing costs, known as origination fees.
While there are several important things to know about personal loans, it helps to be aware of them before signing the dotted line. While these contracts are valuable options that provide funding, these factors can help you determine whether it’s the best financial move for you.
When deciding on the next steps, consider Superior Financial Services as a partner you can trust!