What Is A Personal Loan
Personal loans are a type of credit that consumers take out for a variety of personal reasons. Unlike mortgages or auto loans, personal loans arent earmarked for a specific purpose. You can use the loan for almost any reason.
Personal loans are installment loans if youre approved, youll receive a lump sum of cash that you repay in fixed amounts on a monthly basis until the loan term expires.
To determine whether you qualify for a personal loan, a lender will check your credit and income and gauge your ability to afford the loan. The minimum credit score to qualify for a personal loan is typically 610 to 640. Borrowers with the highest credit scores usually receive the lowest rates.
What Can I Use A Personal Loan For
In general, personal loans are restricted to use for just thatpersonal uses. Lenders typically extend personal loans to borrowers who want to finance things like home improvement, travel and vacations, weddings, car-related expenses and debt consolidation. On the other hand, banks often restrict the use of personal loan funds on post secondary education costs, business purposes and illegal activities.
While most lenders ask prospective borrowers to provide the purpose of the loan in their application, some banks are more strictrequiring borrowers to use the loan on exactly what they identify in the initial loan application.
Can You Refinance A Personal Loan
If you want to refinance your personal loan, youll need to take out a new loan and use that money to pay off your existing loan. Although you can refinance at any time, its best to do it when your credit scores have improved so you can qualify for a lower interest rate. Refinancing also may be a good option if you want to reduce your monthly payments by extending the loan term.
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Our Standards For Debt
Once youve calculated your DTI ratio, youll want to understand how lenders review it when they’re considering your application. Take a look at the guidelines we use:
35% or less: Looking Good – Relative to your income, your debt is at a manageable level.
You most likely have money left over for saving or spending after youve paid your bills. Lenders generally view a lower DTI as favorable.
36% to 49%: Opportunity to improve.
Youre managing your debt adequately, but you may want to consider lowering your DTI. This may put you in a better position to handle unforeseen expenses. If youre looking to borrow, keep in mind that lenders may ask for additional eligibility criteria.
50% or more: Take Action – You may have limited funds to save or spend.
With more than half your income going toward debt payments, you may not have much money left to save, spend, or handle unforeseen expenses. With this DTI ratio, lenders may limit your borrowing options.
How To Borrow From Friends Or Family
The main advantage of receiving a loan from a friend or family member is that your lender is more likely to be flexible about the amount borrowed and payment arrangements. That means you could borrow 100% of the amount you need at a very low-interest rate possibly 0% and get an affordable monthly repayment schedule.
Treat a personal loan issued by a loved one with the same respect and professionalism as you would a loan from a bank. If you plan to borrow money from a bank, credit union or other lending institution, you already know you must be prepared to sign a legal contract outlining your obligations to the lender: On time payments until the loan is paid in full. This contract is called a promissory note.
Should it be any different if you borrow money from friends or family? Not really. Even though they may have known you for years or even a lifetime, they still need assurance that youll pay them back as promised. The fact you know them really well doesnt remove any of the obligations and responsibilities associated with taking on a loan.
It is a wise move to draw up and sign a loan contract regardless of your relationship with the lender. This protects both parties in case of a disagreement. A loan agreement between two individuals is more simplistic but very similar to a standard bank promissory note.
Basic terms for a loan agreement with family or friends should include:
- The amount borrowed
- Interest rate
- Repayment terms
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How Do I Qualify For A Personal Loan
Eligibility criteria for a personal loan can vary by lender. However, there are a few common requirements youll likely come across, including:
- Good credit: Youll typically need good to excellent credit to qualify for a personal loan a good credit score is usually considered to be 700 or higher. There are also several lenders that offer personal loans for bad credit, but these loans tend to have higher interest rates compared to good credit loans.
- Verifiable income: Some lenders have a minimum income requirement while others dont but in either case, youll likely need to show proof of income.
- Low debt-to-income ratio: Your debt-to-income ratio refers to the amount you owe in monthly debt payments compared to your income. Lenders generally prefer a DTI ratio no higher than 40% for a personal loan though some lenders might require a lower ratio than this.
A cosigner can be anyone with good credit such as a parent, other relative, or trusted friend who is willing to share responsibility for the loan. Keep in mind that this means theyll be on the hook if you cant make your payments.
Fixed Obligation Income Ratio
This method is calculated based on the maximum instalments you can honour with your net income post expenses like rent, EMIs, etc. In most cases, lenders consider approximately 50-75% of the net income as instalments. In case your expenses exceed this percentage, banks either increase the tenure of the loan or reduce the amount sanctioned.
Let us consider a personal loan for a 30,000 salary. If you have a monthly EMI of 8,000, you can usually get a personal loan of up to 5.5 lakh. On the other hand, if the monthly EMI that you pay is lower, at say 3,000, you would be eligible for a much higher personal loan of up to 7.7 lakh assuming you have a healthy credit rating and are looking for a tenure of 60 months.
Take a look at some of these possibilities.
Rs. 12.48 lakhs
Rs. 12.00 lakhs
For exact figures, you can use the personal loan eligibility calculator. Do note however, that the calculator assumes that you already satisfy various other personal loan eligibility criteria in terms of credit score, employment history, bank statements and documentation. Your actual eligibility is a culmination of various factors. However, assuming that you satisfy these criteria, the personal loan eligibility calculator will help you get a good estimate of what you can expect before you apply.
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How Much Will I Pay In Interest
Your interest rate depends on a number of factors, including your , loan amount and your term . Interest rates can be as low as 3.49% and as high as 29.99% or more. Typically, you’ll get the lowest interest rate when you have a good or excellent credit score and you choose the shortest repayment term possible.
According to the Fed’s most recent data, the average APR for 24-month personal loans is 9.63%. This is often well below the average credit card APR, which is why many consumers use loans to refinance credit card debt.
Personal loan APR is most often fixed, which means it stays the same for the life of the loan.
Determine The Type Of Bank Loan You Need
Next, figure out what type of bank loan you need. The type of loan you get will depend on what you plan to do with the money. Some common loan types include:
- Auto loans for buying a vehicle
- Home loans , including second mortgages for buying a home or borrowing against the equity in your home
- Personal loans, which can be used for almost any purpose
- Business loans for starting or expanding your business
- Student loans for educational purposes
- Fast loans, which can provide quick cash for emergencies
Some lenders may let you take out a certain type of loan that does not match your specific loan need. For example, you can generally take out a personal loan to pay for health, home repair, or other expenses. However, other loan types must be used for a specific purpose. For example, you generally have to use a mortgage loan to buy a home. In addition, you may not be eligible for all types of loans. To get a student loan, for example, you usually have to provide proof of enrollment in a degree program.
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Personal Loans For Good To Excellent Credit
If theres one piece of advice to keep in mind when applying for a personal loan or any loan for that matter its to strive for excellent credit. This typically means having a credit score of 720 or higher.
With a high score, youll be offered some of the lowest interest rates, as well as the most favorable terms. But even if you only have good rather than excellent credit meaning generally a credit score between 680 and 719 youll still likely be able to get a competitive interest rate on a personal loan.
If youre right on the edge of having a good credit score, one way to improve your score is to lower your debt-to-income ratio, which is the amount of debt you currently have versus the amount of money you earn. A lower ratio is better, so if you start paying off your debt, theres a good chance you can increase your score enough to move into the good credit range.
Of course, regardless of your score, youll still want to do your research on lenders to find a loan with a low interest rate and fair terms. But with a good credit score and a reliable source of income, you should have little problem being approved.
Think Beyond The Monthly Payment
Its important to make sure that you can afford the monthly payment for the loan amount and kind of loan that you are considering. But its also important to consider the amount of risk you are taking on and the overall cost of the loan. Some kinds of loans may have a lower monthly payment, but a higher cost overall. Ask yourself which matters more to you.
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What Are The Benefits Of Personal Loans
Personal loans offer several potential benefits, including:
- Variety of uses: You can use a personal loan for almost any personal expenses, such as home improvements, major purchases, and more. You could also opt to consolidate credit card debt or other kinds of debt with a personal loan, which could get you a lower interest rate and help you pay off your debt faster.
- Fixed rates: Personal loans generally have fixed interest rates meaning your monthly payments wont ever change.
- Long repayment terms: You could have up to seven years to pay off a personal loan, depending on the lender.
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Best Place To Get A Personal Loan
You can get personal loans from three types of institutions:
- Online lenders. These are often technology-based non-bank companies that offer a small range of lending products, including personal loans. Online lenders typically offer low interest rates, loans that are available nationally and can provide funds within 24 to 48 hours.
- Banks. Many local and national banks offer personal loans in addition to other financial products, such as checking and savings accounts. If you have an existing relationship with a bank, you may want to consider opening your personal loan through that bank.
- These are local to your community and tend to offer applications both online and in person. Credit unions require membership, so be sure to check if youre eligible.
The best place to get a personal loan is where you can access the most favorable terms and loan limits that fit your needs.
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You Need A More Affordable Monthly Payment
Maybe you need a more affordable monthly payment than you have now. In that case, refinancing into a new car loan with a longer repayment timeline, a lower interest rate, or both could help you accomplish this goal.
Just keep in mind that extending your repayment timeline leaves you in debt that much longer. You could also wind up paying a lot more in interest as a result.
Pros And Cons Of An Fha Loan
So is an FHA loan worth it? It depends. If youre on the fence, it can help to ask an expert. But theres no doubt an FHA loan can be a lifesaver, especially if you have an imperfect credit history, an unconventional employment or income situation, or you simply dont have a lot of cash on hand for a down payment.
However, there are a few strings attached. Lets look at the pros and cons of an FHA-backed mortgage, so you can weigh your options, and make the best choice for you!
- Low credit scores are not disqualifying
- Higher debt is not disqualifying
- Down payments as low as 3.5%, with very few restrictions on source of income
- No maximum income limits
- Possible mortgage insurance for the entire life of the loan
- Not allowed for investment properties
- Strict upper limits based on median home values in your area
- Stricter appraisal process than for conventional loans
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Apply For Hardship Funds
If youre really struggling for money, you may be able to apply for a hardship fund from your university.
Hardship funds are offered by universities to students who are experiencing serious financial difficulties, and usually the money doesnt have to be repaid. But when we say serious financial difficulties, we mean serious.
As harsh as it may sound, to ensure that these funds are only given to those who need them the most, youll need to prove to your uni that you really are struggling and havent just been irresponsible with your money.
This means handing over bank statements, Student Finance letters and proof of your household income to your uni to show that not only are you out of options, but that you havent frittered away your money away on a PlayStation and new TV.
You can find out more about hardship funds, including whos likely to qualify for help, in our guide to coping with a cash crisis.
Use Your Rate As A Point Of Negotiation
Financing is one of the many ways dealerships can make money off of customers. If you arent preapproved for financing, dealerships may pressure you to accept loan terms with higher rates than you might qualify for. Having preapproval before you go car shopping gives you a powerful advantage in this situation, putting the pressure on the dealership to beat that rate.
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What To Watch Out For With A Personal Loan
You might not actually get the interest rate advertised.
Youll often see the representative APR . Just over half of people who apply for, and are given, a loan should get this rate or better. But this means up to half pay more.
If your credit rating is less than perfect, you might be accepted for a loan but charged a much higher rate of interest.
Ask the lender for a quote before you apply.
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Some personal loans have variable interest rates, meaning they can go up or down.
If youre only just able to afford the initial repayments, its best to avoid this type of loan in case the interest rate does go up.
Look out for any arrangement fees, which will make a loan more expensive.
Make sure you include them when you work out how much the loan is going to cost you.
Arrangement fees will be included in the APR which is why its important to compare APRs rather than just interest rates.
If youre already struggling to pay your bills or repay other money you have borrowed, its important not to take on extra borrowing .
Not All Mortgage Products Are Created Equal
Unless you can buy your home entirely in cash, finding the right property is only half the battle. The other half is choosing the best type of mortgage. Youll likely be paying back your mortgage over a long period of time, so its important to find a loan that meets your needs and budget. When you borrow money from a lender, youre making a legal agreement to repay that loan over a set amount of time .
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What Is The Average Interest Rate On A Personal Loan
The average personal loan interest rates received by borrowers with credit scores of at least 720 who used Credible to take out a loan during the week of Aug. 30, 2021, were:
- 11.72% for a 3-year loan
- 16.51% for a 5-year loan
Keep in mind that personal loan interest rates can vary based on your credit score and other factors. In general, the better your credit, the lower the rate youll get. Heres a breakdown of the interest rates you can generally expect based on your credit score:
|How’s your credit?|
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