A Quick Guide to Personal Loans
We’ve all been short on cash from time to time. Actually, that might be an understatement. More than half of Americans report that they live paycheck to paycheck, which is fine when times are good—but when something goes wrong, you may feel like you’re out of luck. Emergencies such as unexpected medical bills, lost wages from being too unwell to work, a car accident that leaves you without transportation, loss or injury of the primary breadwinner, a broken hot water heater, and more can all leave you with bills that will be tough to pay.
The best way to prepare for cash emergencies is to build up an emergency savings fund. But that takes time, and you simply may not have enough extra money when you need it. That’s where personal loans come in. Many people choose personal loans when they need cash immediately to cover a temporary expense. Not sure if a personal loan is right for you? Check out our personal loan guide to get your questions answered.
What Is a Personal Loan?
A personal loan is money that is lent to you from a bank, credit union, or other credible financial institution. Personal loans are unsecured, which means that you don’t have to put up any collateral, such as your house or car, to guarantee one. When you obtain a personal loan, you borrow money at a fixed interest rate, over an agreed-upon length of time, and then pay it back in a consistent monthly payment.
In the past, most personal loans were obtained from brick-and-mortar banks. Today, online banking institutions make it simple to apply for a personal loan. To get a personal loan, research a reputable lender. Many lenders will let you apply online or over the phone and will give you a response within a day or two. After you qualify for the personal loan, you agree to the terms, which outline your loan amount, interest rate, and loan repayment schedule. Then the money will be deposited into your bank account, usually within a business day, for you to use as you need.
You can receive a personal loan in amounts from $100 to several thousand dollars, depending on your credit and the lender. Work with your lender to make sure you aren’t borrowing more than you can afford to pay back.
What Are the Benefits of a Personal Loan?
There are a number of reasons why you might benefit from a personal loan, including:
- Quick access to needed cash. If an emergency pops up, such as the need to travel for a family emergency, unexpected car trouble, shut-off utilities, medical bills, and more, personal loans can help.
- Borrow without risking assets. Unsecured loans provide the money you need without risking your home or other assets.
- Improve your credit score. Consistent, on-time payments on your loan can build credit if you don’t have a history yet, and improve your score if you do.
- Easy application process. Online lenders and quick loan application turnarounds mean you get the money you need fast, without hassle.
Can I Get a Personal Loan with Bad Credit?
As part of the personal loan application process, many lenders will do a credit check. Your credit score reflects your personal habits regarding how you deal with debt. A lower credit score means that in the past you may have been late on payments and are a little riskier to lend money to.
The credit score you need to qualify for a loan depends on your lender. Although lenders tend to prefer higher credit scores, there are certainly ones that will accept bad credit. Online lenders tend to be a little more flexible. If you have poor credit, you may be offered a personal loan with higher interest rates. The good news is that if you make your payments on time, you can improve your credit score, making it easier to apply for other loans, including mortgages, in the future.
How Do I Repay My Personal Loan?
Your lender will set a repayment period for your personal loan, which can be from six to 12 months or longer. You’ll also have a set amount to pay every month. With a longer repayment period, your monthly bills will be smaller, but you’ll end up paying more in interest. So to save money in the long run, you will benefit from a shorter repayment period. Work with your lender to make sure you can afford to pay your loan back.
Typically, a personal loan is used to pay for an immediate, one-time expense that requires a cash payment. This way, you have the money you need now, and can gradually pay it back each month. When you get your paycheck, set aside money to pay for your necessities: food, rent, utility bills, and personal loan payments. Falling behind on your personal loan repayments can damage your credit score, make the loan more expensive overall, and send you spinning into a cycle of debt. Before your loan is paid off, you may need to make some personal sacrifices, such as cooking at home instead of going out to eat, buying secondhand, and spending less on entertainment.
If you make all your payments and repay your debt on time, personal loans can be a great financial tool to help you get through tough times. This personal loan guide is a starting point for doing additional research into applying for a personal loan for quick cash.