Personal loan being used for many purposes.

Important Facts On Personal Loans

A personal loan is no minor matter. It is actually a transaction that can affect your finances in a number of positive and negative ways. If you find yourself about to take out a personal loan, there are some things that you should be aware of. Here are 6 pieces of information that you should know about.

1) They Can Be Secured Or Unsecured

First, you should know that your loan can be either secured or unsecured.

A secured loan will be backed by some real property. This is property that can be seized by the bank if you default on your obligations. In most cases, this will be the item that you are purchasing with the loan. For example, if you are financing a car, the car itself will become collateral for the loan.

An unsecured loan will not be backed by real property or assets. This is the case with many personal loans that you take out online. Unsecured loans are great in that no property of yours will be at risk, but interest rates and fees will usually be higher with this type of loan because it is riskier for the lender.

2) They Are Really Installment Loans

With a personal loan, you borrow a set amount of money and then pay it back over time. That makes a personal loan an installment loan. Most personal loans will have terms from 1 year to 7 years and will have monthly payments. Loan amounts can range from as little as 1,000 dollars to over 50,000 dollars.

3) You Can Get Them Locally Or Online

Traditionally, the only way to get a loan was to visit a local “brick and mortar” bank, but this has changed. If you have great to excellent credit, a local bank still remains your best option because they will usually be able to extend you the best offer. If you have bad credit though, you now have options.

Online lending has become increasingly popular, especially for those looking for convenience or who have some credit challenges. Many online lenders, such as the ones we give you access to are used to dealing with less than perfect credit. In fact, many of them specialize in bad credit loans.

4) Shopping For A Loan Can Affect Your Credit

When you apply for a personal loan, your lender will do a hard inquiry. This means that the inquiry will show up on your credit report and can cause your score to drop a few points. The impact will be minimal, but if you already have credit issues, it is something that should be considered.

To minimize the effect of the hard inquiry or hard credit pull, you should shop for your loan over a short time period. Multiple inquiries in a short period will usually be considered a single inquiry, because lenders know that most borrowers will shop their loans around to different banks. Spread the inquiries out to far though and the effect can be more substantial.

5) There Will Be Interest & Fees

Lenders obviously need to make money from their loans, so this should come as no surprise. What might surprise you is the amount that you will pay.

For those of you with good credit, fees and interest will be on the low side. Secured loans can be obtained with low single digit interest rates and origination fees are usually non existent. If you have bad credit however, things will be different.

With less than perfect credit, expect to pay double digit interest with rates as high as 36 percent. Non traditional lenders can even charge higher interest and it is not uncommon for lenders such as payday lenders to charge effective interest rates that are in the hundreds of percent. They can get away with these high rates by disguising them in the form of origination fees and other charges. When all of the fees and loan charges are taken into account, the effective interest rate is called the APR. An APR is  a way to compare loans of varying interest rates because it takes all charges into account.

6) You May Have Better Options

While a personal loan is an easy solution to a money problem, you may have another solution. Some of these solutions might even be a better option than a personal loan, especially if you have fair credit or poor credit.

Home owners, for example, may be able to take advantage of their equity by applying for a “cash out” refinance or even a home equity line of credit or HELOC. With the home as collateral, this will generally be a very low cost option with rates in the low single digits. Interest may even be tax deductible.

Credit cards can also be a resource, with many credit card companies issuing blank checks that can be used to make purchases. Credit cards should be used with caution however as the interest rate can default to a higher one than the rate used for standard purchases. There also may be additional fees.

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