What Is A Personal Loan And How Does It Work
A personal loan is a type of installment loan that gives you a fixed amount of money, often anywhere from $1,000 to $50,000, in one lump sum. Personal loans are usually unsecured, meaning you dont have to use collateral to secure funds. Repayment terms can range between one and 10 years. Personal loans can be used for almost anything, although specific lenders may impose restrictions on their use. Interest rates on personal loans are fixed, so your interest rate will not change while you repay your loan.
Applying for a personal loan is similar to applying for a credit card. Youll need to enter your personal information, your financial information and the details about your desired loan. Before approving you, the lender will run a hard credit check, which may temporarily lower your credit score. If your financial picture and credit score are sufficient for the lender often, you need a credit score in the mid-600s the lender will set your interest rate, loan amount and terms. You can sign up for a Bankrate account to get prequalified for a personal loan in under 2 minutes.
Youll receive personal loan funds all at once and begin paying them back immediately. Your payment will be the same amount every month until your loan is paid off: a portion of your principal, plus interest charges.
How To Get Monthly Installment Loans
A decent loan has regular monthly payments that reduce your debt over time. Where can you find these loans? Look at small institutions and look online:
- Local banks and credit unionsinstitutions with a community focus are your best bet
- Peer-to-peer lenders that allow individuals to fund your loan
- Other online non-bank lenders
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Do Not Miss The Purpose
Once the money is in, it is really tempting to use it for other purposes such as shopping, movies, and other activities. Remember why you applied for a loan in the first place. Whatever your need is, whether it is to renovate your house or pay medical bills, use the funds primarily for that purpose.
It is always best to have a proper plan in place before you apply for a loan. Create a budget accordingly and stick to it. Do not waste your money on unnecessary expenses. Once you have used the funds to fulfill your primary purpose, then you can wisely use the rest for your other needs and wants.
Use A Credit Card To Build Credit Not Get Into Debt
I believe that personal credit cards should only be used to build credit.
Dont you dare use them to rack up thousands of dollars in debt!
They have high interest rates and low monthly payments.
Many people end up getting stuck with ten, twenty, or even thirty thousand dollars in debt!
The average American family has $6,270 in credit card debt. This can be a huge burden, and a tremendous waste of money.
- Read now:
On the other hand, a high credit score really comes in handy, and the first step to do that is to get a credit card and treat it like a debit card.
That means that you pay off 90% of the balance every month.
Ill explain why you want a tiny balance later.
For those who may have low credit or no credit and need to establish a reliable payment history, a secured credit card or a student card from a credit union or institutional issuer may be the best option.
Avoid retail store credit cards.
All you do is apply, keep that line of credit open to develop a history of on-time payments, and keep your balances low.
This will grow your credit score.
Then, keep a watchful eye on your credit on multiple credit bureaus to ensure youre making real progress as well as flagging any instances of identity theft or fraudulent charges made to your credit card account that are affecting your credit rating.
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Build Your Credit Score
Once you get your loan approved and disbursed, all your transactions will be recorded on your credit history. This is a great opportunity for you to build up your credit history.
Make regular and punctual loan repayments. Maintain a certain amount in your account. Keep some funds aside as savings. Pay all your bills and utilities promptly.
Clear your outstanding dues. If you have more than one credit card, try to clear the outstanding due on at least one card.
All those actions will reflect positively on your credit score. As you increase and maintain an excellent credit score, it will be easy for you to get any other banking products and services in the future.
See Also: 4 Ways to Start Building Great Credit
Calculate Monthly Instalments Carefully
EMI payments shouldnt drain out your savings and become a burden on your finances. In order to make sure this doesnt happen, it is imperative to calculate the EMI amount and ensure capital capability to pay it over the stipulated tenure. Usually, the calculation is that the EMIs should be less than 10% of your monthly income. In case the EMIs are higher, you risk draining your savings and this will negatively impact your daily expenses.
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Borrow Only What You Can Afford To Pay Back
Have you ever heard the wise investing advice, never invest more than youre willing to lose?
We can modify this statement to say, never spend more than you can afford to pay back!
Although you should be using your credit card on small purchases that you would be paying upfront in your day-to-day life, some people see credit cards as a way to afford items that are typically out of their budget.
This typically results in a snowball effect, with borrowers going into credit card debt because theyre buying what they cant afford.
They are using their credit cards to afford things because theyre going into debt, and spiraling further and further out of control.
Before you purchase something, ask yourself, do I have enough cash flow to buy this now or in the immediate future without my credit card?
If the answer is no, dont use your card for it.
Another helpful tip?
Avoid using your card for a cash advance.
These may be convenient if youre struggling to pay bills, but theyre just as tricky as other short-term loans and can easily result in a credit card balance you cant pay off.
Sometimes people use credit cards when they lose their job or when personal tragedy strikes.
Its better to ask a family member for a loan or to find another way.
It may hurt more in the short-term, but almost anything is better than paying those 15%+ interest fees that most credit cards have.
Boosting Your Credit Score
Your credit score is based on a number of factors, one of which is your account mix. This is an evaluation of the different types of credit in your current credit situation and in your credit history.
There are several different types of credit, but revolving accounts and installment accounts are the most common. Revolving accounts include credit cards and similar types of credit, while installment accounts include student loans, mortgages, automobile loans, and personal loans.
People who have not made a major financed purchase like a home or car may not have installment loans in their credit mix a personal loan can help build a more diverse account mix, possibly increasing your credit score.
Another way personal loans can help build your credit is by reducing what is known as your debt usage ratio. This is a figure representing how much credit is available to you, versus how much of that credit is currently in use.
If you have a credit card with a $1,000 limit and there is a current balance of $500, your debt usage ratio is quite high, at 50%. The higher your debt usage ratio, the more it can impact your credit.
Through the reduction of your debt usage ratio, your credit score could increase, especially since installment loans arent figured as part of the ratio.
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Make Sure It Makes Sense
The first step is to make sure that borrowing is actually the right choice. If youve heard of good debt and bad debt youre familiar with the concept: good debt pays for things that provide long-term value and possibly even gain value over time. Bad debt pays for current consumption, assets that depreciate in value too fast like new cars, or risky assets, or investments that might lose their full value or not generate enough to cover the principal and the cost of debt.
Examples of good debt include:
- A college degree, since people with a degree will tend to earn more over their lifetimes
- The purchase of an affordable homeif all goes wellsince it can provide long-term financial benefits and control over your environment
Examples of bad debt include:
- Buying an expensive car, because it will lose value immediately, and continue to lose value over time
- Paying bills such as cable, phone bills, and entertainment expenses, since theres no way you can keep borrowing to cover basic expensesitll all come to an ugly end someday
Before you borrow, evaluate how long the debt will last and how much it will cost in totaladding principal and interestcompared to how long the benefits will last, and to what amounts they will rise or fall. If its not an investment in your future, look at other ways to fund the need.
How Should I Manage My Personal Loan
A well-managed personal loan may improve your credit score, while a badly managed loan can reduce it. Here are our top four tips for managing your loan and protecting your score:
We’re a credit broker, not a lender
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Assessing Your Debt Tolerance
Your comfort level with a given amount of debt depends on your tolerance for risk. Its important that financial professionals explain the downside of taking on debt to clients, so that they can determine how comfortable they are with that risk, says Mook.
For example, if you borrow to diversify your portfolio, are you willing to ride out a volatile stretch in the market? Also consider your time horizon: Are you determined to pay off an investment-related debt in two years, or would you be okay if it took longer? Questions like these can help you assess whether you feel comfortable taking on debt as a part of your investment strategy.
Mook says debt tolerance is different for everyone. You always want to look at your cash flow and make sure you have enough income to service your debt, says Mook. But determining the amount of good debt you should take on is more art than science.
Its important to talk with a financial professional before incorporating debt into your financial strategy.
Learn how we can help you address yourshort- and long-term financial goals.
How To Choose Personal Loan Tenure Wisely
The repayment tenure on your personal loan affects the equated monthly instalment amount and the total interest payable. A longer tenure would translate to lower EMIs while a shorter one would mean that the EMI amount will be higher. Opting for a longer tenure would also mean that you will be paying a higher interest over the loan tenure.
Choosing the right tenure on your personal loan is important because it will help you save money in the long run. Hence, to help you choose just the right tenure on your personal loan, we have listed some tips for you below:
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Create A Monthly Budget
It would be more challenging to manage your personal loan if you don’t always know where your money is going or how much you’re spending for everything. Creating a monthly budget is not a new thing, and it is necessary no matter what your financial situation is. However, budgeting is even more vital when you have a personal loan to take care of.
You might need to make adjustments to your budget to manage your loan and avoid incurring penalties. Cutting unnecessary expenses is an excellent place to start. It will also help if you monitor your expenses all the time so you can adjust your budget right away. But before you take out a personal loan, be sure to set an accurate budget and stick to it as much as possible.
Manage Your Credit Utilization Ratio
Your credit card’s limit is the maximum amount of debt you can carry at one time. You shouldn’t spend right up to your credit card’s limit, though. Getting too close to the limit will negatively affect your credit score due to a calculation called your credit utilization ratio.
Your credit utilization ratio is a measure of your credit card balance against your total credit limit. To maximize your credit score, keep your credit utilization ratio below 35%. For example, if you have a credit card with a $10,000 limit, try not to carry a balance higher than $3,500.
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How To Use A Personal Loan To Pay Off Credit Cards
How does this form of debt consolidation work? Simply put, youd use your personal loan funds to pay off your credit cards, then begin repayment on your new loan. Plus, itll be even better if you obtain a personal loan that doesnt include a prepayment penalty that way, you can pay off your loan ahead of schedule, if possible.
| Example situation |
| $1,000 |
There are a handful of steps to use a personal loan to pay off debt, including:
Check Your Monthly Statement
When you make purchases with your credit card, you’re responsible for paying it off. Youll receive monthly statements outlining your spending and noting your required payment.
Whether you prefer online, a phone app, or tracking due dates in a paper planner, monitor your credit card balances and automatic bill payments from your card. Regular monitoring can also quickly alert you to suspicious transactions.
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Digital Lending Platforms Leverage The Power Of Advanced Technology Such As Ai And Data Science To Provide Customized Personal Loans To People Across The Credit Spectrum
Digital lending platforms leverage the power of advanced technology such as AI and Data Science, to provide customized personal loans to people across the credit spectrum. They require minimal documentation and the loan is approved almost instantly. While taking a loan from a digital lender to meet your pressing financial needs is a quick and hassle-free process, choosing the right lender is very essential.
Here are some ways that can help you choose the best loan provider:
Choose the right loan product
There are a thousand lenders in the market who have several loan products to offer that continue to grow with each passing day. If the need is immediate and has a sense of urgency tied to it, a personal loan that takes longer to get approved might not be a feasible choice. A borrower should first evaluate and pick the right product to fund their need. While personal loan needs collaterals, there are other Lines of Credit products that require no collateral, offer instant loan disbursals and provide flexible repayment options
Compare loan interest rates
Once you figure out how much money you need to fund a certain need, check the interest rate charged by the lender. The lower the interest rate, the lower would be the EMIs. Small percentage differences may seem trivial, but they can make your loan much costlier in the long run. Therefore, before applying for a loan, it is a must to compare the interest rates charged by different lenders.
Understand the fine print
