What is a Personal Loan? A Guide to Rates, Terms, and How to Qualify for Financing

I’m not sure when the world stopped caring about privacy. The internet has evolved into a swamp full of online diaries exposing all sorts of confidential (and often untrue) information. 

But before the internet was invented, some daytime TV shows thrived on revealing (and celebrating) the most private and embarrassing secrets of best friends, troubled teens, disgraced politicians, and many other interesting people. 

This seems like a travesty to me, but I’m pleased to report that privacy is alive and well: You can get a personal loan without revealing how you plan to use the money. That’s because it’s… personal!

A personal loan is a type of loan that allows you to borrow a fixed amount of money and repay it with interest over a set period, usually without needing to specify how the funds will be used.

A personal loan can be used for all sorts of things, like fixing up your house, paying off debt, or even taking a vacation. It’s money you borrow from a lender that you pay back over time with interest. 

Let’s discuss the basics of personal loans, how your credit score affects your options, and help you decide whether it is the right product for your needs.

Suppose you’re fixing to take out a personal loan. In that case, it’s super important to get a good understanding of what you’re getting yourself into. You’ve got to know what these loans are for, exactly how they work, and all the basic nuts and bolts before hitching yourself up to one.

Types of Personal Loans

Now, when it comes to personal loans, there’s an entire herd of different types out there. One of the most common kinds is the fixed-rate loan. The rate of interest for this loan does not move, much like a stubborn mule that refuses to budge, come what may. The result is that your repayments always remain as regular as clockwork.

Then there’s the variable-rate loan, which can change faster than a caffeinated chameleon. The interest rate on these bad boys might start off low, but it can jump up or down depending on the financial winds, so you have to stay sharp.

Personal loans are usually unsecured, meaning you don’t have to put up collateral to get approved. However, suppose your credit is lousy and your income is little to brag about. In that case, you can consider getting a secured personal loan, where you pledge to hand over some valuable property to protect the lender if you can’t pay the bill.

Lastly, you’ve got debt consolidation loans, where you round up all those high-interest debts, such as credit card balances, and replace them with one easy-to-manage monthly payment. This can make life simpler, but you’d best watch that interest rate so it doesn’t come back to bite you like a rabid coyote.

Common Uses for Personal Loans

You can use personal loans for a stack of varied purposes. Here are some ways people put them to work:

• Paying off high-interest credit card debt
• Renovating your kitchen or any other home improvements
• Covering medical bills or other big expenses that come out of nowhere
• Taking a well-deserved vacation 
• Paying for a wedding or some other life milestone 

Personal loans can surely help in a pinch, whether you’re patching up the house or fixing up your finances. But remember, borrowing money is serious business, and you should be confident you can make those monthly payments on time before signing on the dotted line!

The Application Process

There are basically two ways to choose a personal loan provider. You can choose a direct lender, but first, you’ll have to identify a trustworthy one. This method makes it more time-consuming to shop around for the best deal.

Alternatively, you can go down the route of a loan-finding service to match you with a lender. They’ll round up various options, and you’ll pick the one that suits you best. It’s free and saves you some legwork, but you might not always get the best deal, so keep your wits about you as best you can.

When you approach a lender for that loan, they will not hand over the cash without knowing if you’re a trustworthy borrower. You’ll have to supply information like your income, proof of where you hang your hat, and even your Social Security number so they can snoop into your credit history.

Sometimes, they want tax returns, pay stubs, or a listing of all of your debts — in short, anything to confirm that you’re not about to bite off more than you can chew.

Sign on the dotted line of that loan agreement (after looking it over carefully), and you’ll be sitting pretty. Typically, the money hits your account faster than a hound on a ham bone — usually by the next business day. Most lenders deposit the money directly into your bank account, which is where they’ll automatically draw your monthly payments. Right, nice of them, don’t you reckon?

Well, if you’re thinking about wrangling a personal loan, you better know how your credit score fits into the whole operation. That little ol’ number will affect whether you get approved, what interest rate they’ll slap on you, and how those repayment terms stack up.

Approval

Your credit score is the key to getting a loan, and lenders study it really closely. If your score is 700 or higher, most lenders will welcome you. But if you’re in the 600s, expect a tougher time getting approved and more hoops to jump through.

Now, if you’re under 600, most lenders will turn you down. However, some specialize in working with low-credit folks, but don’t be fooled — they’re in it for the profit, not to do you a favor.

Interest Rates

Your credit score isn’t just about getting your foot in the door; it also influences how much you’ll be paying to borrow money. People with good credit scores, upward of 700, can expect some really attractive interest rates, typically falling between 10% to 12%.

Here is a look at the average personal loan interest rates based on credit scores:

If your credit is in the trenches (i.e., less than 600), lenders may treat you like a wild bull — dangerous and unpredictable. Rates go through the roof, varying between 18% to 36%. That kind of interest can shove you into a hole that’s difficult to dig out of. You’ll be paying a mountain in interest just for the privilege of borrowing.

Repayment Terms and Conditions

Personal loan repayment terms are usually based on monthly payments, and the length of the loan can range from 12 months to five years or even more. That makes them easier to budget for, but if you’re late with a payment or miss one, look to get hit with late fees faster than Grandma’s hug.

Some even have early repayment fees, so trying to pay them off early will cost you extra. Lenders are constantly looking for ways to squeeze a little more out of you. Be certain to comb through the fine print because once you sign, you are in it for the whole ride, no matter what!

Getting a personal loan is a real double-edged sword, and you must understand the good and the bad before you mount that horse. Here are the pros and cons to help you weigh your options.

Benefits

• Flexible Use: One of the handiest things about personal loans is that you can use them for just about anything. Whether you’re fixing up the yacht, paying down debts, or even throwing a big ol’ family shindig, it’s all the same to the lender so long as you pay it back.

• Predictable Payments: Personal loans require the same monthly payments. There’s no guesswork involved — like knowing when your alarm clock is going to interrupt your dreams. You can plan ahead without any surprises.

• Fixed Interest Rates: Personal loans are most frequently offered with fixed interest rates, which means the rate you start with is the rate you keep. Think of it like hitching your buggy to a steady horse: Your rate will remain the same no matter what the economy decides to do.

Drawbacks 

• Possible High Interest Rates: If it feels like your credit score’s been dragged through the mud, personal loans may slap on high interest rates that’ll make you feel like you’re paying back much more than what you borrowed. It’s almost like having a hole in your pocket — no matter how much money you put in, the debt doesn’t seem to shrink fast enough.

• Potential Fees: Personal loans can be full of sneaky fees that may pop up when you least expect them. Whether it is late fees, origination fees, or fees for paying off your loan too early, lenders seem to have a fee for every occasion, so keep your eyes peeled and read that fine print in the loan agreement.

• Credit Score Impact: Now, taking out a loan can help your credit score if you play by the rules, but missing payments will tank your score faster than a rainstorm ruins a hayride. If you aren’t careful, a personal loan can leave your credit score worse off than when you started.

Personal loans can be a real lifesaver when used wisely. Still, they can also turn into a load of trouble if you don’t tread carefully. Always weigh the pros and cons of each side before leaping in, or you could find yourself over your head in debt.

Choosing the right personal loan is almost as important as selecting the right golf club to blast your way out of a sand trap. You need one that will suit your needs without making matters worse.

Let’s take a look at how to line up your loan with your financial situation so that you don’t end up tangled in the rough, searching for your lost ball.

1. Assess Your Financial Needs: First, determine precisely what you require before you borrow. Apply for no more than you can handle, lest you dig yourself a hole you may never climb out of. Sift out the absolute necessities, whether to fix up your place, pay down debt, or manage an emergency, and fit your loan to your budget like the properly sized Stetson hat to your noggin.

2. Evaluate Lenders and Offers: Amazingly, not all lenders are cut from the same cloth, so you must be choosy when deciding whom to deal with. Look for a lender with a good credit reputation, reasonable terms, and moderate interest rates. Check out reviews (for instance, on BadCredit.org), ask around, and compare offers as you would shopping at a flea market. Make sure the loan doesn’t contain any tricks, such as unusual penalty terms or ballooning interest rates that leave you up in the air.

3. Read the Fine Print: Whatever you do, don’t sign on the dotted line until you’ve combed through every word in that loan agreement like you’re looking for ticks on a dog. That fine print may conceal obscure information, such as early payoff penalties, late fees, and even sneaky interest rate changes.

Once you have signed, you are bound to those terms, so make sure you’re clear on every detail before you lock yourself in.

It’s wise to investigate all your options before jumping headfirst into a personal loan. With any luck, you might find that there’s more than one way to skin a cat when it comes to borrowing money. Knowing the alternatives may save some migraines down the road.

Credit Cards

Credit cards may sound really nice since you can swipe them and be on your way. However, they come with high interest rates if you don’t pay off your balance at the end of the month. 

Credit card interest rates can be much higher than those for most personal loans, so you may want to think twice before using plastic for major expenses.

They are good for small purchases or in case of emergencies, but running up large debts on credit cards may put you into a cycle that’s about as challenging to break as a bad habit.

Home Equity Loans or Lines of Credit (HELOCs)

A home equity loan or line of credit (HELOC) uses the equity you’ve built in your home as the amount you can borrow against, which may be larger than what you would be able to get with a personal loan. 

Equity is what’s left over after you subtract your mortgage balance from your home’s current market value.

Home loans also generally have lower interest rates, but they do have one sticking point: Your house serves as collateral. If you do not make the payments on this loan, you may end up losing your home.

It’s well worth considering, especially if you need a big loan and can handle the risk. Otherwise, be very careful, or you could end up without a roof over your head.

Payday Loans

Payday loans are the fast-food version of borrowing: quick, easy, and about as unhealthy as it gets. These loans can give you cash faster than a catfish swallows the bait, but they come with interest rates that could choke a horse. 

In a pinch, payday loans may sound good, but they may have you worse off than walking barefoot in a field of thistles. If you’re thinking about payday loans, think twice and find another option before falling into a financial quagmire.

You’re expected to pay them back by your next paycheck, and if you don’t, the fees and interest stack up faster than pancakes at the IHOP. And when you get into a debt trap with payday loans, it’s hard to dig out. 

I love the flexibility of personal loans, and if your credit is good, they’re pretty easy to get. What I don’t like is how much they charge folks with less-than-ideal credit. 

Still, they are a great alternative if you need money without countless strings attached, so consider one the next time cash is tight.