A personal loan is a small loan (small in comparison to a mortgage) that does not use assets as collateral. Because there is no collateral involved, it is sometimes also called an unsecured loan. A personal loan will require repaying a set amount every month over the repayment period.
What Is the Approval Process For a Personal Loan?
Because a personal loan is not secured against an asset like a house or a car, the lender will look at things like:
- Credit history
- Free cash flow
- Credit score
- Debt to income ratio
If your personal credit is not good, then you may not qualify for a personal loan. The lender may offer you a co-signed loan, secured loan, or recommend you apply for a credit card instead. A co-signed loan means that someone with good credit guarantees that they will be responsible for any missed payments. If you do not pay back your loan, it will affect your guarantor’s credit history. A secured loan means that the lender uses an asset like a car or property as collateral.
What Can I Use My Personal Loan For?
Most lenders do not need information about how you plan to spend the loan. However, some lenders may set restrictions for how you can use the loan. For example, you might not be able to use your personal loan for education expenses and for obvious reasons, you cannot use a personal loan for gambling.
Personal loans are often used for things like:
- Purchasing a car
- Debt repayments
Should I Shop Around For Personal Loans?
Yes, just like any other financial product, you should compare the offerings of a number of lenders. Shop around to find the terms that fit your needs. You should consider the personal loan’s repayment schedule, the APR, and even the term of the loan. It is important to borrow an amount that you know you can afford to pay back. If you struggle to make the repayments, you risk damaging your credit score, making it harder for you to get credit cards, mortgages, and other lines of credit in the future. If you are taking out a personal loan in order to pay off credit card debt, then the APR should be lower than your credit card’s APR.
Before taking out a personal loan, sit down and work your budget. Make sure you have the means to pay the monthly repayments every month. This could be cutting out unnecessary expenses or finding a side hustle for the near future. Really look at if you need to take out a personal loan or if the expense can wait until you can afford it.