Most household owners today are struggling to pay their bills as the tough economic times continue biting. While prudent financial management can help you live comfortably, there are times you need extra money to fill in a cash shortfall. For instance, if your house needs renovations, you require a lump sum for the project.
This is where a personal loan comes in handy. This type of loan is underwritten by your creditworthiness and you must have a steady flow of income to repay the principal amount and interest rates in monthly installments. It is important to appreciate that when you opt for this type of financing, you enter into a legal contract with the lender and the loan must be repaid as per the terms of your agreement.
Before applying for personal loans, here are some key takeaways that will help you make an informed decision:
1.Different Types of Personal Loans
Every consumer has unique financial needs and lenders have come up with innovative products to meet such needs. Some of these loans include debt-consolidation loans, student loans, peer-to-peer lending, credit card loans, home equity, and balance transfer among others. Every loan is unique and you need to talk to the lender in order to match your needs with a loan that is suitable.
2.Secured vs. Unsecured Loans
While there are many types of personal loans in the market, the main distinction lies in whether the loan is secured or unsecured. A secured loan requires collateral, which can be an asset such as your car or home. This loan has lower interest rates because the lender faces fewer risks. An unsecured loan on the other hand is given without any collateral and due to the risk involved, the interest rates are higher. For an unsecured loan, you also need a constant flow of income from where the fixed monthly installments will be deducted.
3.Criteria for Approval
The main consideration when applying for personal loans is your credit score and history. If your credit score is poor, you are considered a high risk borrower by financial institutions. This means your application might be rejected or approved albeit with higher interest rates. If you have been paying your bills promptly and you have never defaulted, obtaining this type of loan is easier and the interest rates are favorable.
One of the reasons consumers opt for personal loans is the fact that they have control over how the money is spent. Once your application is processed and you get your cash, the only obligation you have is to start repaying it on the due date.
5.Impact of Personal loans on Credit Rating
You can greatly improve your credit rating by repaying the loan promptly, as this will be reported to the credit reporting agencies and delays are also reflected which can affect your score negatively. It is thus important to make prompt payments to guarantee you can access lower interest rates in future.
There you have it; if you have a pressing need, this type of loan can be used to cater for virtually anything but remember to evaluate your needs and expected income flow.
Sheryl Hannigan is a freelance writer focusing on emerging financial products. She has previously worked in the banking industry as a financial advisor. Sheryl works and lives in Los Angeles with her family.