Applying for a personal loan can be a great financial step when done right. Thanks to relatively low interest rates and easy approval processes, personal loans can help you boost your financial standing. However, like every other form of debt, you must be careful when applying for one. Manage your loans incorrectly, and you might end up making your situation worse.
Applying for a personal loan is straightforward. However, before you choose to apply, you must keep a few things in mind. Here are 4 characteristics of personal loans that you must know when applying for one.
Qualification is Easy
Most financial institutions place lower qualification barriers on personal loans than on other forms of debt. Thus, you’ll find that these loans have quick approvals and fewer application restrictions. Their interest rates also tend to be lower than comparable debt.
For instance, personal loan interest rates are far lower than what you’ll find on credit card debt. Thanks to these relatively low interest rates, personal loans are a great way of reducing your interest burden by switching high interest debt for a lower rate. Typically, banks fix interest rates and terms to help you pay off the debt within 7 years (84 months.)
The interest rates are usually fixed, unlike mortgages that can have variable rates. These fixed rates mean your monthly payment is predictable, and you can easily budget for it. In many cases, lenders do not charge early or prepayment penalties, something that is prevalent with other forms of debt. Additionally, you can apply and qualify for a personal loan even if you have other forms of outstanding debt with your bank or financial institution.
Overall, thanks to quick and easy approvals, personal loans offer a great basket of features if you’re looking to consolidate or lower your debt burden.
Apply for What You Can Afford
While approvals are simple, this doesn’t mean personal loans don’t have pitfalls that can make your personal financial situation worse. They are still a form of debt, and you must carefully plan how you’ll use the money and what your monthly interest payments will look like.
You don’t need a perfect credit score or rating to apply, but defaulting on your personal loan will certainly make your score worse. It is best to look at your current monthly debt payments and substitute your personal loan’s payments for them.
The more you borrow, the greater the interest rate will be. Always keep your financial goals in mind before applying for a loan and stick to your plan.
Use it for Business Funding
Personal loans aren’t just used to clear personal debt. They can also provide an influx of capital for your small business or startup. Many entrepreneurs prefer using personal loans as startup capital since most new companies do not qualify for financing from banks.
Even established small businesses face significant hurdles receiving financing, with banks asking for high capital reserves and borderline unrealistic revenue records. Many small business loans do not provide a lump sum. Instead, the proceeds are released periodically once you provide invoices and other documentation.
Thus, personal loans offer a great way for business owners to fund their ideas and begin. Most personal loans do not require collateral to secure the loan, which makes them an even better choice. You’ll receive a lump sum that you can use in any way you want. However, there are a few negatives to using personal loans for business purposes.
First, your business’ credit score does not improve when using a personal loan. After all, the debt resides in your name, not your business’. Second, while small business loans are painful to apply and qualify for, they provide greater sums for business use. Thus, if your funding needs are high, a personal loan isn’t the best choice.
For almost every other purpose though, personal loans are an excellent choice.
Shop for Best Terms
These days, online lenders have taken a significant chunk of the personal loan business away from traditional banks. Consumers have benefited massively from this move since online lenders use many other credit scoring models beyond the outdated credit score rubric.
Online lenders can offer more flexible terms and even allow you to crowdsource funds. Platforms such as Prosper offer a range of options for people looking to source funds for any purpose. Interest rates are fixed based on proprietary credit models. You shouldn’t expect miracles from these lenders, however, they can potentially offer much better terms than traditional banks.
Qualification is straightforward, and approvals typically take around 48 hours or less. Defaulting on these loans will affect your credit score, so don’t think these funds are free money.
A Great Financing Option
Personal loans are just one of many financing options out there, but they’re the best for certain goals. If your objective is to reduce your debt burden and borrow relatively low amounts of money, personal loans are your best choice. Remember to review the terms of the loan, and you’ll manage to boost your financial standing immeasurably.