The Answer Guide to Your Personal Loan Questions

Everyone needs help from time to time, including a bit of a financial boost. Businesses will often seek out business loans in a strategic manner so they can smooth out operations or fund their growth. Individuals and households also have the opportunity to seek out extra cash in the format of personal loans. 

Personal loans are an outstanding way to borrow money at lower rates than a credit card might offer. You can apply for a personal loan through a local financial institution or an online lender and enjoy approval within just a manner of minutes. Once the funds have been transferred to your account, you can use that cash to pay for those immediate needs you might have, such as critical car repairs or to cover a renter's deposit. For many, a small personal loan can offer massive benefits as it can provide windfall assistance just when you need. 

Of course, if this is your first time applying for a personal loan, then you probably have some questions. The following is a look at some of the more common questions we get about personal loans and their answers:

The Answer Guide to Your Personal Loan Questions

What Constitutes a Personal Loan?

Most personal loans have the following criteria:

  • Small amounts.  Typically, personal loans will be under $25,000, with many individuals applying for personal loans in the $500 to $5,000 range. This is because personal loans are best used for immediate needs.
  • Brief Fixed-term. Most personal loans will have a fixed end date by which you will have to pay the full amount by, and that timeline is rarely more than five years. This is different from credit cards that feature flexible and open dates by which you have to meet minimum payments, but are not required to pay the full sum before any given date. The short-term also makes them different from other types of loans, such as a home loan which may extend to more than thirty years. 
  • Unsecured. You won't have to put any type of down payment or collateral on the line in order to be approved for a personal loan.
  • Medium interest. However, because you don't have to put down collateral, personal loans do have higher interest rates than secured loans like home equity loans. But because of the small amount and brief term, personal loans typically have lower interest rates than credit cards. 

What is the Difference Between a Fixed and Variable Interest Rate Loans? Lump Sums and Line of Credits?

Most personal loans will come with a fixed interest rate, which means that as the lendee, you will pay the same interest rate over the course of the loan. Fixed interest rate personal loans are typically given for lump sum amounts in which you get the full borrowed amount at one time.

However, some lenders will also offer variable interest rate loans in which the interest percentage changes over time. This is typically done in tandem with a credit line loan in which you may be approved for up to $5,000 over the course of five years but you choose how much to borrow out of that amount and when. A variable interest rate will then be associated with the amount you borrow. If you go this route, make sure you know all the interest rate details before signing onto any loan and if you do choose a variable-rate loan, ask for rate caps.

How Do I Qualify for a Personal Loan?

There are two types of personal loans: Secured and unsecured. Which one you choose will change how you go about qualifying for the loan. 

Secured means that you are willing to offer the bank something in the event you are not able to pay the remaining of the balance, such as a vehicle. To apply for a secured personal loan, you'll typically have to bring ownership papers showing that what you are offering as collateral is yours to offer. 

In contrast, unsecured loans require no collateral or down payment. Instead, the lender is trusting you simply to pay the loan in full by the end of the term. But how do they know to trust you? Generlaly, lenders will have a minimum acceptable credit score, such as between 600 and 700 and/or will ask for proof of income that shows the lendee's ability to repay the loan. 

For either type of loan, the lendee will typically be asked to provide a driver's license, pay stubs, and banking information from whence the future payments will come from. 

Finding the Right Solution for You

Personal loans are an excellent solution for when you need cash fast. However, they aren't the only solution to help you cover sudden and unexpected needs. Explore our website to learn more about the other alternatives like credit cards and home equity loans that can help you move forward.