Although the coronavirus pandemic could end in 2021 thanks to vaccines, today it continues to wreak havoc worldwide and in the American economy. And if you have recently lost your income and are short of cash, or if you are having difficulty paying off your debts, consider applying for a personal loan.
But what is a personal loan? What is the difference with a mortgage or credit card? Is it time to take out a personal loan and what is the best way to do that? CNN Underscored has the answers to all your questions about personal loans to help you decide if a loan is right for you.
A personal loan is a type of debt where an individual usually receives a fixed amount of money from a bank, credit union or online lender, which must be repaid over a certain period of time, often two to five years.
There are many reasons to take out a personal loan. In general, the money can be used for any purpose, but some of the most common scenarios are paying off debts, consolidating medical bills, starting a business, financing home repairs or other personal needs.
Personal loans are usually – but not always – unsecured, which means that you do not give any collateral for the loan if you do not pay it back (also called a guarantee). This is one of the differences between personal loans and mortgages; instead, mortgages are covered by your home or land as collateral.
Because personal loans are unsecured, they are usually more expensive than secured loans, such as mortgages. But if a secured loan has a lower interest rate, if you are unable to repay it, you may lose the assets you have given as collateral, such as your home, if you default on your mortgage.
Personal loans are generally unsecured, but they also cost more than a secured loan.
However, even with an unsecured personal loan, if you do not repay the money, the lender can still legally sue you for the amount you owe by sending your loan to a collection agency, reporting your default to the credit agencies (which will affect your credit history) and even suing you.
Save money with a personal lending offer on LendingTree, an online lending marketplace.
There is no single solution for personal loan applications. You can search for personal loans from banks, credit unions or online lenders. There are also online marketplaces such as LendingTree that allow you to quickly view offers from an entire network of lenders at once.
When using the online marketplace, you only need to enter your data once to be considered by many lenders. The information you need to provide includes the amount of money you need, the purpose of the loan, the timeframe in which you need the money and other important details.
As soon as you enter your contact details, they will be sent to dozens of lenders for review and in no time you will receive a list of personalized loan offers that may be suitable for you. From there, you can decide which offers are most suitable for your situation and work directly with those specific lenders.
Click here to compare different personal lending offers on LendingTree.
The interest rate on personal loans can vary considerably, depending on various factors.
According to the Federal Reserve, the average 24-month interest rate on personal loans in August 2020, the last month for which data are available, was 9.34%. However, the interest rate on personal loans can vary greatly, from 6% to 36%, depending on the lender, the borrower and the terms and conditions of the loan.
Here are the main factors that determine your interest rate and other costs related to a personal loan:
Amount of the loan : The amount you want to borrow for a personal loan will influence the interest rate, because larger personal loans usually have a higher interest rate. Personal loans can range from $1,000 to $50,000 or more in some cases.
Length: Interest rates are also usually higher for long-term loans, which means that the more you have to pay for a personal loan, the more you will pay, both because of the higher interest rate and the fact that you pay interest over a longer period of time.
Credit Score : The higher the creditworthiness, the lower the interest rate on a personal loan. People with a good credit rating also have a better chance of getting a personal loan, although there are also personal loans available for people with a lower credit rating.
Expenditure : You must take into account all costs associated with your personal loan. For example, some lenders charge an application fee, i.e. a fee for opening an individual loan. Processing costs can range from 1% to 8%, but some lenders don’t charge processing costs at all, so look around.
Early termination indemnity : If your personal loan is accompanied by an advance payment, you may have to pay an additional amount if you decide to pay your loan in advance at any time. A typical prepayment may consist of interest for several months or a percentage of the loan balance. Again, some lenders do not charge fines for personal loans, so you should pay close attention to the terms of your loan.
Check the interest rates for personal loans on LendingTree.
If you are considering a personal loan, it is important to know how much you ultimately pay each month. Using a personal loan calculator, you can determine how much you owe each month and for the duration of the loan. This is a great tool to use before you sign up to view your spending from a budgetary perspective.
Enter the total amount you want to borrow, the interest rate and the duration of the loan, and the calculator will immediately break down your monthly and total payments.
For example, suppose you are considering taking out a $10,000 personal loan to pay off your medical debt. One lender offers you an interest rate of 9.5% that you must repay within five years, and another lender offers you an interest rate of 8% with a repayment period of three years.
You can enter the two offers one after the other in your personal loan calculator to see how much each offer costs. The calculator shows that in this case, although an interest rate of 9.5% results in a monthly payment of $210, the total payment would be $12,601. On the other hand, an interest rate of 8% will increase your monthly payment to $313, but you only pay $11,281 over the term of the loan, which is a significant saving.
Use the Personal Loan Calculator to find out your monthly payment and how much you will pay over the term of the loan.
The Personal Loan Calculator also offers a full amortisation schedule that breaks down the amount you pay each month on your personal loan in terms of principal and interest.
Ultimately, a personal loan repayment calculator will help you determine which loan is most suitable for your specific situation.
If there is one advice you should take into account when applying for a personal loan – or another loan – it is to aim for an excellent credit score. This usually means that you have a credit rating of 720 or higher.
With a high score, you benefit from some of the lowest interest rates and the most favourable conditions. But even if you only have a good instead of excellent creditworthiness – usually between 680 and 719 – you can still get a low interest rate on a personal loan.
If you are close to getting a good credit score, one way to improve your score is to reduce your debt/income ratio, which is the amount of debt you currently have in relation to the money you earn. A lower ratio is preferred. So, if you start reducing your debt, chances are you can increase your score enough to get into a good credit range.
Of course, whatever your score, you always have to look for lenders to find a low-interest loan on fair terms. But with a good creditworthiness and a reliable source of income, you should have no problem getting certified.
Get personalized loan offers with good to excellent credit at LendingTree.
For many it can be very difficult to get into a good or excellent credit range. But don’t let that discourage you. Although a fair credit score – between 640 and 679 – is not ideal, there are always lenders who offer you a personal loan.
Even if you only have a fairly high credit rating, you can get a personal loan from some lenders.
However, there is a good chance that you will be offered a higher interest rate than if you had a good or excellent creditworthiness. In addition, fees may apply or the terms of a personal loan may be less attractive, and these may vary depending on income and monthly cash flow.
With a good credit score, you’re likely to have fewer options for a personal loan, but that’s where the online marketplace can be very useful – because your information can be reviewed by several lenders at the same time, giving you the best chances of finding the right loan.
If you have made bad financial decisions in the past or if you don’t have a credit history yet, this will probably be reflected in your credit rating. A credit rating below 640 certainly doesn’t give you the best options for obtaining a personal loan, but you don’t have any luck at all.
An online marketer will share your information with their lending network, even if you have a bad credit score, and some lenders will still offer you a personal loan. Unfortunately, you will almost certainly have to pay a relatively high interest rate if you have a poor credit rating. You may even be asked to provide security for a personal loan, which may include a good like your car. This means that you may lose your guarantee if you are unable to repay the loan.
People with poor credit who are considering getting a personal loan in the future can now take some time to improve their creditworthiness. For example, you can pay your credit card bills on time, pay more than the required minimum, correct errors in your credit report and even negotiate with your current creditor to accept a partial payment.
These steps are not easy and can take time and perseverance. But in the end, they can make a big difference when it comes to improving your financial future and increasing your chances of getting a personal loan on favourable terms.
Find out if you are eligible for a personal loan from LendingTree, even if you have a bad credit.
If you need money now, consider a personal loan.
Applying for a personal loan really depends on your situation. If you plan to use a personal loan for non-essential expenses – such as a luxury holiday or a long trip – we strongly advise against it. After all, personal loans are expensive financing options and you end up paying a lot of extra money for an unnecessary reason.
But if you want to consolidate your existing debt and can get a lower interest rate on your personal loan compared to what you currently pay on your credit card, it is worth considering. You should also consider other options, such as. For example, a credit card to transfer the balance or a mortgage refinancing if you are a homeowner, both of which can offer lower interest rates or better conditions than a personal loan.
After all, personal loans are just another tool in your financial toolbox. Given the current economic conditions, it may be attractive to have cash available to reduce the cost of an individual loan. So do your homework knowing what to look for in a personal loan and find the best deal for you.
To learn more about personal loans, visit LendingTree and get quotes from various lenders.
What is a good interest rate on a personal loan?A good interest rate on a personal loan depends on your credit score. In general, you should look for a rate below the average APR — 10.3 percent to 12.5 percent for excellent credit, 13.5 percent to 15.5 percent for good credit, 17.8 percent to 19.9 percent for average credit and 28.5 percent to 32 percent for bad credit.How does the coronavirus affect personal loans?In response to unprecedented market conditions, some banks have announced new loan offerings and lower interest rates, though many have also begun tightening their eligibility requirements. Borrowers with existing personal loans may be able to take advantage of loan relief programs: While programs vary by lender, it may be possible to temporarily defer payments or waive fees.What are the requirements for a personal loan?While every lender's requirements will vary, you may be granted a personal loan based on three factors: your credit score, your income and your payment history. While all of these elements are important to overall financial health, lenders typically focus more heavily on your credit score.How much can you borrow with a personal loan?The amount you can borrow with a personal loan depends on the lender and your credit score. Many lenders offer loans between $5,000 and $50,000, but some may offer loans as low as $500 or as high as $100,000.,A good interest rate on a personal loan depends on your credit score. In general, you should look for a rate below the average APR — 10.3 percent to 12.5 percent for excellent credit, 13.5 percent to 15.5 percent for good credit, 17.8 percent to 19.9 percent for average credit and 28.5 percent to 32 percent for bad credit.,In response to unprecedented market conditions, some banks have announced new loan offerings and lower interest rates, though many have also begun tightening their eligibility requirements. Borrowers with existing personal loans may be able to take advantage of loan relief programs: While programs vary by lender, it may be possible to temporarily defer payments or waive fees.,While every lender's requirements will vary, you may be granted a personal loan based on three factors: your credit score, your income and your payment history. While all of these elements are important to overall financial health, lenders typically focus more heavily on your credit score.,The amount you can borrow with a personal loan depends on the lender and your credit score. Many lenders offer loans between $5,000 and $50,000, but some may offer loans as low as $500 or as high as $100,000.,What is a good interest rate on a personal loan?A good interest rate on a personal loan is one that makes your monthly payments manageable over the loan's term. The lowest rates are usually around 6%, and the highest go up to 36%. The best interest rates go to good- or excellent-credit borrowers (690 or higher FICO score) with debt-to-income ratios below 40% and steady income.Where can I get a personal loan with a low interest rate?Online lenders tend to offer personal loans with lower interest rates than banks, unless you're an existing customer at a bank that offers unsecured loans. Online lenders also let you pre-qualify, so you can see your rate before applying without a hard credit pull. You may also find some of the lowest rates on personal loans at local credit union.How is my personal loan rate decided?When you apply for a personal loan, lenders use factors like your credit, income and existing debt to determine the interest rate you'll get. The loan term also affects the interest rate, and some lenders consider the loan's purpose.,A good interest rate on a personal loan is one that makes your monthly payments manageable over the loan's term. The lowest rates are usually around 6%, and the highest go up to 36%. The best interest rates go to good- or excellent-credit borrowers (690 or higher FICO score) with debt-to-income ratios below 40% and steady income.,Online lenders tend to offer personal loans with lower interest rates than banks, unless you're an existing customer at a bank that offers unsecured loans. Online lenders also let you pre-qualify, so you can see your rate before applying without a hard credit pull. You may also find some of the lowest rates on personal loans at local credit union.,When you apply for a personal loan, lenders use factors like your credit, income and existing debt to determine the interest rate you'll get. 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