Don’t Be Scared! Everything You Need to Know About Personal Loans
Personal loans, also known as unsecured loans, are one of the most multifaceted products in the industry. Booming in popularity over the past few years, personal loans provide financial answers to many different types of people.
Personal loans differ from payday loans, as they tend to have higher borrowing amounts, lower interest rates, and longer terms. Approval for a personal loan is often based on a borrower's current employment as well as employment and credit history. Though these loans are typically approved for applicants with good credit scores, they are also a great option for those who want to consolidate their debt into a single monthly payment with a lower interest rate.
While traditional lenders such as, banks and large financial institutions, issue loans for varying amounts, the online personal loan industry has become a go-to for smaller day-to-day operations. From micro-loan sites to peer-to-peer lending platforms, the online personal loan industry is jam-packed with lending options, each with its own subtle distinction. Therefore, if you’re interested in taking out a personal loan, it is recommended that you first understand the market to ensure your final decisions’ success.
Common Personal Loan Uses:
Personal loans are issued for a variety of different reasons. Though they do not serve one specific purpose, they are most commonly used for large, one-time expenses, such as:
- Home renovations and/or appliances
- Medical expenses
- College tuition
- Engagement rings and/or weddings
To ensure a successful loan decision, potential borrowers should confirm that a loan’s benefits outweigh the cost of taking on debt. Therefore, when considering the above-mentioned uses, it is important to note that these are not revenue generating borrowing purposes. Personal loans with revenue generating borrowing purposes include, home and/or automobile purchases as well as debt consolidation or initial business costs.
Personal Loans and Interest Rates:
With regards to personal loans, an interest rate is the rate that a lender will charge a borrower for lending. Interest rates are used to help incentivize lenders and minimize risk. Specifically, interest rates motivate lenders to advance loans (which in turn stimulates economic growth) as well as offer lenders insurance for the risk of borrowers defaulting.
It is critical that potential borrowers fully understand interest rates, as they play a vital role in determining the full financial impact and total end cost of a personal loan. Interest rates fluctuate for each individual borrower and are typically calculated using four variables - the borrowing amount, the borrower’s personal credit score, the term of the loan, and the borrower’s use of either fixed or variable rates. Due to the numerous stipulations associated with interest rates, borrowers should note that the interest rates advertised by lenders are not always guaranteed.