Everything you need to know about personal loans

Personal loans are a predictable way of borrowing money. Here’s everything you need to know.

Personal loans offer a set amount of money at a fixed interest rate and a fixed monthly payment. That’s why they are considered a predictable option when it comes to borrowing money.

But let’s dig a bit deeper and see what are the advantages and disadvantages of personal loans.

What’s cool about personal loans?

1-    If you have good credit, you can pay a fixed interest rate that is usually much lower than the ones offered by other products.

2-    You have the exact same monthly payment, month after month, so you know exactly how much you need and when it will be paid off.

3-    As a personal loan offers a set amount of money as opposed to a line of credit, there is no way you could be tempted to overspend and purchase things you then struggle to pay off.

What’s not so cool about personal loans?

1-    In order to get a loan with the best interest rates, you need to have an excellent credit score —or individuals with a FICO score of 740 or higher.

2-    As you have to make a fixed payment each month, you can’t make smaller payments if you ever need to. You will have to come up with the exact amount to pay each monthly balance in full.

See also: The complete guide to getting a dental loan

3-    Some personal loans have fees, such as an origination fee or insurance.
Personal loans are a good option for those who need to borrow for a specific goal such as a home remodel or repair, as it allows borrowers to come up with a repayment plan thanks to the fixed payments they offer. 

Before requesting a personal loan, compare lenders and what they offer to choose the one that suits you best!    

What’s the difference between a loan and a line of credit?

Do you know what's the difference between these two ways of borrowing money? Do you know their pros and cons?  Take a look at this guide and learn which one you actually need!

Although a loan and a line of credit may sound quite the same, they are different forms of borrowing and each one has its pros and cons.

So, before you take out either of these options, make sure that you understand the main differences between them.

Here's a mini-guide that can help you learn more about loans and lines of credit.

•    Payment

The way the money is dispersed it's one of the main difference between these two borrowing systems.
In the case of loans, you will receive a lump-sum payment, all at once, and will then regularly pay back that amount with interest over a period of years. This is how mortgages, student loans, auto loans and personal loans work.
Once you borrow the money, you will have fixed monthly payments until you've repaid the entire loan.

On the other hand, a line of credit works more like a credit card. You don't need to borrow up to the maximum, you can borrow exactly what you need and pay back only what you've borrowed.

A great example of a line of credit it the HELOC (Home Equity Line of Credit), in which a lender approves credit for a determined amount of money based on the equity you've built up in your home. You will then start paying it back in monthly installments, also with interest.

See also: What will happen with student loan borrowers who are struggling to make ends meet?

Regarding monthly payment, in this case, it will vary depending on the total amount you've borrowed.

•    Interest rates and closing costs

Interest rates are usually lower in loans than in lines of credit. However, closing costs are higher with loans. This means that there are higher fees and charges in a loan.

Personal loans you should never pay

If you are about to take out a personal loan, then you should make some research to learn which is the best option for you. In order to save you some time, take a look at the personal loans you should never pay!

There are many reasons why you may need to take out a personal loan at some point in your life. Maybe you will need to pay for a new car or your kid's braces. In these cases, personal loans are the most popular option as they usually offer much lower interest rates than other methods.

Unlike credit cards, personal loans come with fixed interest rates, fixed repayment periods and fixed monthly payments. That's why personal rates are considered a predictable and suitable option.

Another good news about personal loans often come without fees. Nevertheless, these types of loans are only available for those with good, very good or exceptional credit or FICO scores over 670.

Those with good or great credit will be able to qualify for personal loans that don't add up fees that make the loan more expensive as time goes by. So, take a look at those fees you should definitely try to avoid!

1. Application fees

Bear in mind that some personal lenders may charge an application fee for their products. These types of fees are non-refundable and are destined to cover the processing costs of the application and setting up of your loan.

Although most lenders don't apply this fee, remember you should check this before taking out your personal loan.

2. Origination fees

As its name suggests, these are fees assessed to originate your loan. Many lenders charge this fee. It can vary according to the lender and also depend on your credit score and other factors.

In some cases, it might be as high as 8%! So check this fee before you apply for a loan.

3. Prepayment fees

These kinds of fees are applied in those cases in which borrowers pay their loans off early.
So, while you are doing some research, remember to look for those personal loans that won't penalize you for prepaying it.

4. Late fees

These types of fees depend on your behavior. Bear in mind that most lenders charge late fees if you don't make your payment on the due date, so make sure you have a payment plan!

You can make early payments, set up a monthly alarm or even set the payment on auto-pay. Choose the best method that helps you pay on time.

5. Returned check fees

There are personal loan lenders that charge an extra fee for check processing in those cases in which your check has been returned. Although it will depend on the lender, these fees are usually around $15-$25 per returned check.

See also: Why are some business owners having their loan forgiveness reduced?

As most of the lenders charge this type of fee, you can avoid them by committing to always have funds in the bank to cover your loan payment.

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