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The Ultimate Guide to Personal Loans

Personal loans are a consumer loan provided to you for use at your own discretion. Some common reasons consumers obtain this type of loan include to pay off medical bills, to pay for a sought after vacation, make changes to their home, or even pay for a wedding. This method of financing can be secured or unsecured and has a fixed loan amount and term, meaning you get the funds once and make fixed payments at predetermined intervals. Some loans have prepayment penalties while others allow you to make extra payments at no extra charge, so make sure you read the fine print and know all of the details on the loan to ensure that you understand the terms.

Where to Get a Personal Loan

Personal loans can be obtained from local banks. Typically, consumers start with the bank where they hold their checking and savings accounts since they already have a relationship with that bank and sometimes have a better chance at getting more favorable terms. Some banks offer a discount on the rate if you choose to have your payments automatically withdrawn from the account you hold there. If you do not have a local bank or you want to shop for the best rates , you can also obtain this type of loan online from a variety of lenders. The process is simple and can be done over the internet and the phone for the most part. Some lenders offer the money to you in as little as 24 hours, but make sure you do your research first to ensure that the bank is reputable and the terms favorable.

Verification Documents to Provide

Once you decide on the lender you wish to use, you will need to provide proper documents to verify who you are, your income, proof of where you live, and where you work. Every lender differs on the documents they require, but be prepared to show your last 2 years' worth of W-2s if you are a salaried employee or 2 years of your tax returns if you are self-employed or work on commission. You will also need to provide your employer's information so the bank can verify the information you provide and any previous addresses if you moved within the last 2 years.

The Definition of a Secured Loan

Personal loans can be secured or unsecured. Secured financing occurs when you put up collateral in exchange for the loan. The collateral in this loan might surprise you though – it is not putting up the collateral of the item you purchase, such as occurs with a mortgage, when your home serves as the security. With personal financing, you have the option to use one of the following items for collateral: savings account, car equity, or home equity. If you apply for the loan with the bank that holds your savings account and you have a significant amount in the account, getting qualified for the loan will be quick and easy as they hold the collateral already. If you wish to use the equity in your car or home, the loan amount varies depending on the amount of equity you have. The equity is the amount of the car or home that you own free and clear because you either put down that amount of money as a down payment or you paid off that portion of the loan – it is considered your portion of the investment.

The Definition of an Unsecured Loan

An unsecured personal loan is the opposite of the secured option. In this scenario, your loan approval is based on your creditworthiness. Due to the fact you do not give the bank any type of "insurance policy" in the form of collateral, you must have high credit and other positive qualifying factors in order to obtain this loan. Banks look for a stable employment history (holding the same job for at least the last two years with the same or higher income); a low amount of debts compared to your gross monthly income; and a blemish-free credit history for at least the last two years. Banks require much higher qualification factors for this type of loan because they do not have anything to guarantee that they will get paid on the loan should you default on your payments.

The Interest Rates

Interest rates vary widely on personal loans. Banks offer different rates for each category, which means determining if you will get a secured or unsecured loan will help you determine the interest rate range you fall into. Generally, the rates you pay are higher than any other loan type because of their risk level. In the event that you are able to secure the loan with equity in your home or car, you will be able to lower the rate slightly. Typically, secured loans start around 5 percent but can go up to as high as 10 percent and unsecured loans start around 10 percent and go as high as 30 percent. The rate the bank provides you depends on the loan amount, the length of the term, your credit history, income, employment, and debt ratio.

Bad Credit and Personal Loans

The good news is that bad credit does not automatically mean you will not get a personal loan. If you are in dire need of the funds, there are entities out there that will provide them; you will have to pay the price though. Sometimes if you are starting over and trying to get a fresh start, however, it can be worth the price you pay. Every bank determines "bad credit" in a different way. Some banks consider scores lower than 630 bad, while others will consider scores as low as 600; some even going as low as 500. If you have a score on the lower end of the spectrum, it pays to shop around to get the best rate and terms for your loan. It is typically better to go with a personal loan with an interest rate of 30 percent or higher than it is to trust a lender that takes borrowers with no credit or does not consider their credit as the fees and interest rates are astronomical on these loan types.

Defaulting on your Payments

If you take a personal loan because you are knee deep in debt and then find that you cannot keep up with the payments, you could find yourself in trouble in one of two ways.

If you have a secured loan, the bank will seize your collateral. This usually happens after several missed payments and attempts on the part of the bank to get the money from you. Due to the fact you put your items up for collateral, the bank does not have to provide you with a warning; your items will just be repossessed. The bank then sells these items to help pay off your loan and the fees accrued throughout the process as an attorney must be involved in the repossession.

If you have an unsecured loan, the bank does not have anything to repossess. In this case, they must come after you and your money. Typically, lenders will send your account to their collections department after two missed payments. After a few months of attempting to reach you via phone and mail, they will then sell your account to a collection agency. This company will then take over the account, charging you extravagant fees in order to make a profit for taking on the loan. You are then on the hook for more than just the principal and interest if you plan to make good on the loan. If the collection agency does not settle your loan, they can then sue you for the amount of the loan plus any fees that accrued throughout the process, which allows them to come after your money and/or any assets you own.

Personal loans can be a great way to get the funds you need, but make sure you enter into the process with proper knowledge of what the bank provides. You can expect to pay much higher interest rates than any other type of loan and undergo the scrutiny of your financial situation to ensure that you can make good on the payments. In the end, this type of financing can help you get out of a financial problem while allowing you to increase your credit score with timely payments of the loan its