Surprisingly, personal loan applications are growing by the day. Even though we’re in a digital age where everything can be found online and transactions can be made online as well, people still prefer to visit their financial institution in person to make loan applications. But why is that? Personal loans are one of the most common loans for everyday people who need quick cash.
From a car loan to a credit card cash advance, these loans provide you with money fast when you need it most. However, they come with many stipulations and hidden costs that may not always be apparent at first glance. If you’re thinking about getting a personal loan, here are some things you should know before applying for one.
Disclaimer: Be sure to read the fine print before signing anything.
The first thing you should do before signing any agreement is to read the fine print. This includes reading the entire loan contract and ensuring you understand every stipulation and fine print in it. If you don’t understand something, ask the person helping you with the loan application to explain it to you or refer to the financial institution’s website to find answers to your questions.
You’ll want to be sure you understand the loan’s conditions and repayment terms before you sign on the dotted line. There are many ways that a loan can be structured, and each loan will have its own set of terms and conditions. Some of these terms and conditions may seem unfair or overly punitive, but they are usually there to protect the lender.
1. How Do Personal Loans Work???
Personal loans are a type of installment loan. That means you borrow a fixed amount of money and pay it back with interest in monthly payments over the life of the loan, which typically ranges from 12 to 36 months. Once you’ve paid your loan in full, your account is closed. You must apply for a new loan if you need more money.
Loan amounts vary from lender to lender, the amount you qualify for is based on your credit health (i.e. how confident creditors are that you’ll pay them back if they lend you money).
It’s important to think about why you need the money and then chooses the type of loan that’s most appropriate based on your current financial situation.
2. Types of Personal Loans
There are two types of personal loans, secured and unsecured.
- Unsecured personal loans aren’t backed by collateral. The lender decides whether you qualify based on your financial history. If you don’t qualify for an unsecured loan or want a lower interest rate, some lenders also offer secured loans.
- Secured personal loans are backed by collateral, such as a car logbook or a title deed. If you’re unable to make your payments, your lender typically has the right to claim your asset as payment for the loan.
3. Where can you Get A Personal Loan??
You can get a personal loan from a bank or finance company, or family and friends. Banks and other lenders will look at your income, savings, what you want to spend the money on, how much debt you already have, and so on. The cost of borrowing also depends on various factors such as your credit history, age, job history, and income.
There are many things to consider when taking out a personal loan, including the interest rate, repayment term, and what fees you might pay.
4. Personal loans vs. other lending options
While personal loans can provide the cash you need for a variety of situations, they may not be your best choice. If you have good credit, you may qualify for a balance transfer credit card with a 0% introductory APR. If you can pay off the balance before the interest rate goes up, a credit card may be a better option.
Be aware: If you get a balance transfer card and can’t pay off your balance or make a late payment before the introductory rate expires, you may rack up a lot in interest charges.
If you’re a homeowner, you might consider a home equity loan or line of credit, sometimes called HELs or HELOCs, respectively. These types of loans could provide the financing you need for larger loan amounts at low rates. While HELs are generally installment loans, HELOCs are a type of revolving credit. But beware: Your house becomes the collateral for these types of accounts. If you default, your lender usually has the right to foreclose on your home as payment for the loan.
5. Impact on your credit scores
When you apply for a loan, the lender will pull your credit as part of the application process. This is known as a hard inquiry and will usually lower your credit scores by a few points.
Generally speaking, hard inquiries stay on your credit reports for about two years.
When you’re shopping around for the best rates, some lenders that you already have an account with will review your credit. This is known as a soft inquiry and doesn’t affect your credit scores.
Consider checking your rates with lenders that will do soft pulls, which won’t impact your scores.
6. Interest Rates and Other Fees
Interest rates and fees can make a big difference in how much you pay over the life of a loan, and they vary widely from lender to lender. Here are some things to consider.
- Interest rates: Rates typically range from around 5% to 36%, depending on the lender and your credit. In general, the better your credit, the lower your interest rate will be. And the longer your loan term, the more interest you’re likely to pay.
- Origination fees: Some lenders charge a fee to cover the cost of processing the loan. Origination fees typically range from 1% to 6% of the loan amount.
- Prepayment penalties: Some lenders charge a fee if you pay off your loan early because early repayment means that the lenders are missing out on some of the interest that they would have otherwise earned.
Before signing on the dotted line, consider adding up all the costs associated with the loan, not just the interest rate, to determine the total amount of money you’ll be responsible for repaying.
While a personal loan may be a good option if you need extra cash for a specific purpose, there are many factors to consider before deciding what type of credit is best for your situation.
As a next step, check out our take on some of Mwananchi Credit Ltd’s loan products and continue exploring your options.
