When you're short on cash, look at personal loans.
There are many reasons why someone might need a personal loan, from unexpected expenses to a major life event. They can be used for just about anything and lots of people get them, but not many people understand them.
Today, we're going to try and fix that. In this post, we'll give you a little insight into how personal loans work by telling you 5 important things you should understand.
There are many positives to taking out a loan, but there are many financial risks involved as well. Keep reading and find out more about this process.
- They're Unsecured
There are two types of loans that people take out: secured and unsecured. Secured loans have collateral attached to them, so in the event that you don't pay the money back, your valuables or savings account will be at stake.
Personal loans are unsecured loans, which means that your belongings are safe. However, this makes them more difficult to obtain and there are certainly other means by which they punish you for neglected payments (ie. reporting to credit bureaus, hiring a collections agency, etc.).
- Fixed Amounts
Personal loans usually come in fixed amounts, so unlike a credit card or line of credit that allows you to continually withdraw money, you get a one time loan of a fixed amount of money. Typically, a personal loan will be somewhere between $1,000 and $50,000, depending on your credit score and income.
- Interest Rates
Interest rates also depend on your credit score. Fortunately, with almost all personal loans, the interest rate will be locked, which makes it easy to budget payments every month.
These rates usually fall between 4% and 35%, with lower credit scores paying more and higher credit scores paying less. Your term length will also help determine the interest rate. Most personal loan terms will be between 1 and 5 years in length; the longer the loan term, the higher the interest rate will be.
- Fees
There are also fees in addition to the interest rate. We're not just talking about fees for late payments, which can be painful, but there are also origination fees and potential prepayment penalties that most lenders put in the fine print.
An origination fee is for simply processing the loan and they can range between 1-8%. A prepayment penalty is a fee for paying off the loan before the terms are up and the amount will also vary. You have to make sure to read the agreement before signing.
- Where to Get One
Most people will first look to their bank when trying to secure a personal loan, but that's not the only option. There are also credit unions, peer to peer lenders, and online lenders like captaincash.ca that will process personal loans.
Always go with the one that will least damage your credit, which is usually the one with the best terms and lowest interest rate. If you are a veteran, you can benefit from grants and personal loans sponsored by the US government. These specialized loans are offered at low-interest rates and long-term repayments, depending on your credit score.
Learning How Personal Loans Work Before Getting One
It's important to learn how personal loans work before you dive in headfirst. If you don't, you might find yourself in more financial trouble than you started with. Always read the fine print and select the best loan for you.
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