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Personal loans are useful for people who want to do things like consolidate their debts and pay for home improvements. Before you talk to a lender, make sure you understand the following things about personal loans. The more you know, the more likely it is that you’ll get an affordable loan that meets your needs.
Lenders typically offer two types of personal loans: secured and unsecured loans. Secured loans are backed by collateral, such as your home, savings account or investment vehicles. Unsecured loans, however, are not backed by collateral.
If you have collateral, you can often get a lower interest rate by choosing a secured loan. Collateral will also make it easier for you to qualify for a loan. Without something to back your loan, lenders may turn down your application or force you to pay high interest rates.
With or without collateral, the interest rates for personal loans can vary considerably. Depending on your credit history and the loan’s term, you may qualify for an interest rate as low as 5 percent or as high as 36 percent.
Always get information from several lenders before you accept a personal loan offer. Just because one lender charges an outrageous interest rate doesn’t necessarily mean that others will. Check out multiple online loan reviews to get an idea of what will work best for you.
When a lender decides to extend a personal loan to you, the financial institution expects to make a certain amount of money from your interest payments. Savvy borrowers, however, will try to avoid as much interest as possible by repaying their loans ahead of schedule.
Many lenders add prepayment penalties to their personal loans to prevent borrowers from lowering their interest payments. If you try to repay the loan’s full amount ahead of schedule, the lender will charge you a fee.
Depending on the prepayment fee and your interest rate, you may still save money by repaying your loan early. Regardless, you should know ahead of time whether the lender will charge you for early repayment.
Prepayment penalties aren’t the only fees that can make your loan more expensive. Some lenders also charge origination fees that cost between 1 and 6 percent of your loan’s value. The origination fee often gets deducted automatically from your loan, so you may receive less money than you think.
Personal loans can help borrowers consolidate debt or pay for unexpected expenses. Make sure you read the fine print of every personal loan offer so you can choose an option that’s right for you.