What You Need to Know about Personal Loans before You Apply for One

Written by: Amanda Price
09/19/2019

personal-loan

When it comes to borrowing money from a bank or lender, you have numerous choices. These choices range from home equity loans to credit cards. These options are called personal loans. Personal loans are used for different reasons. For example, you may need money for a family emergency, consolidate debts or make a major purchase. Most personal loans are short-term loans. This means that you must repay the loan in a specific time period, such as six or 24 months. In addition to a short-term repayment, a personal loan is generally for a limited amount. The amount ranges from $100 to $5,000. Depending on the lender, the amount could be higher.

Deciding if a Personal Loan Right for You

You may need to pay a bill or have a specific emergency. This is often the time when a personal loan looks perfect. However, it is also the time when you must consider the responsibilities and benefits that come with this type of loan.

For example, a personal loan takes a portion of your future income. If you decide to acquire a personal loan, understand that you are setting aside future income to repay the loan for a specific time. Thus, you must have financial discipline. Financial discipline means borrowing wisely. The term “borrowing wisely” means that you only borrow the amount of money you can repay.

A lender may offer you more money than you need. That doesn’t mean you should take that amount. This is especially true if you can’t afford to repay a large amount. In fact, it’s important to consider the unexpected expense when considering whether to obtain a personal loan. You should have enough future income to make future personal loan payments and handle any unexpected expenses such as your vehicle needing a repair. This way you aren’t late on your loan payments because you need to repair your car or take care of an unexpected expense.

Applying for a Personal Loan

What happens when you apply for a personal loan? Well, you’re required to complete a credit application. This is the first step for every lender. The lender wants to know important information such as your Social Security number, name, date of birth, address and income. They also want to know your employer and other sources of income.

On your application, you are also required to list your monthly expenses. This helps the lender know if you have too many bills to repay them. In addition to asking you what type of bills you have, the lender will also obtain your credit report. Your credit report will list your credit score, late payments, collections and types of accounts you have. Your credit history is used to predict your creditworthiness. This means how likely you are to repay your personal loan. It is also important for another reason. Your credit history determines whether you will be approved for the personal loan and for how much.

What is Credit Insurance?

Credit insurance is an option in many states. Credit insurance is a type of policy that will pay off the personal loan if you become disabled or die. You can purchase the insurance at the time you acquire your personal loan.
In deciding whether you should obtain credit insurance when taking out a personal loan, consider some questions. Do you have a repayment plan if you become disabled or die before the personal loan is repaid? Do you have another type of credit insurance that will kick in if you are disabled and can’t repay the loan? Can you afford to pay for the insurance and personal loan?

Some Personal Loans Require a CoSigner

In most cases, people know if they’ll be able to obtain a personal loan based on their current credit score. If you don’t have good credit, a lender may turn you down for a personal loan. If you know you won’t be approved for a loan without help, you may need a co-signer.

A co-signer is a person who is responsible for repaying the loan if you cannot. A co-signer is often used when you don’t have the income level to obtain to qualify for a loan, weak credit history or too many financial obligations.
If you choose a co-signer, their credit history will be pulled to determine if they are creditworthy enough to secure the loan. For example, if they are determined to have too much debt obligations, you could be turned down for the loan.

When Taking Out a Personal Loan Decide whether You Want a Secured or Unsecured Loan

A personal loan has two options: secured and unsecured loans. A secured personal loan is backed by collateral. Collateral is personal belongings you have, such as a car or home. If you default, or do not repay the loan, the lender can claim that property as their own. This will satisfy the debt.

An unsecured loan is based on a promise to pay. This means that you sign a document promising that you will repay the loan. If you default, the lender does not receive any personal property. Instead, they can sue you or place your account in collections to obtain the money you owe.

A personal loan can be a good option when you need money fast. It can solve a lot of immediate financial problems, but the loan does have advantages and disadvantages. Before taking out a personal loan, understand the repayment options and time frame. You also want to determine if you have the future income to repay the loan. Lastly, figure out if you want a secured or unsecured loan. The latter may require a higher interest rate and other fees. If you need a cosigner, find someone you can trust like a relative. However, make sure you repay the loan so they don’t have to do so.


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