A personal loan is a loan that is paid back in equal installments over a set period of time. Interest rates are fixed, meaning they don’t change. Although most personal loans are unsecured and do not require collateral, you can find secured personal loans, which can offer you larger loan amounts and lower rates.
A personal loan can be used for just about anything, including:
• Debt consolidation or refinancing
• Home improvement projects
• Wedding expenses
• Vacation costs
• Medical bills
Ideally, you should use a personal loan for something you really need, rather than to finance a shopping spree.
Because a personal loan is backed only by your promise to repay it, lenders look for factors like a healthy credit score, a low debt-to-income ratio and stable employment history. If you have all of the above, you could be deemed a relatively low risk, which would help you qualify for a personal loan.
If you don’t qualify the first time around, you could either work on improving your credit score before reapplying or looking for a reliable cosigner who has a better score.
Yes, you can qualify for a personal loan with bad credit. However, it might be harder to receive approval since lenders consider borrowers with bad credit to be of higher risk of missing payments. Even though some lenders will approve borrowers with bad credit, they may charge a higher origination fee and offer rates into the triple-digits, depending on your credit.
For a more affordable loan, you could seek out a cosigner or joint borrower. A secured loan, which requires collateral like your car or savings, can also be a good alternative to an unsecured personal loan. Just remember: If you get a secured loan and fall behind on payments, you risk losing your collateral.
You can find bad credit personal loans through online lenders, banks and credit unions. Since you’ll see less favorable terms from lenders, it’s even more important for you to compare personal loan interest rates, fees and discounts to ensure you’re receiving the most affordable personal loan for your situation.
Some mortgages, student loans and personal loans come with origination fees. This fee is a service charge the borrower pays the lender for processing the application, preparing any documentation, executing the loans and covering administrative costs. The fee may be added to the loan principal so that the borrower can pay it back over time.
Lenders may calculate the origination fee as a percentage of the loan or a flat fee. The fee can vary depending on the type of loan, the loan term, the loan’s size, and the lender. Additionally, the lender will factor in if you have good credit or have a cosigner. If you have less than ideal credit, you may end up paying a higher origination fee. The average origination fee ranges between 1% and 8% so, if you have poor credit, you may pay up to 8% of the total loan amount.
If you end up paying off your loan earlier than within the fixed term, you could be charged a prepayment penalty. Because your lender would be losing out on the interest fees they would have been getting if you kept making payments until the end of the term, they might charge you this penalty to offset this financial loss.
While this kind of charge is most common in mortgages and car loans, make sure you read your loan agreement carefully to see whether it could be applicable to your personal loan as well.
Using a personal loan may make sense if you can afford monthly payments for the entirety of the loan term, and it costs less than other types of credit. For example, if you have high-interest credit card debt with multiple revolving balances, you can use a personal loan to consolidate the debt, ideally at a lower interest rate. Consolidating debt with a personal loan may make your debt payments more manageable since you only have to worry about one payment and be able to pay off the loan faster.
A personal loan may also be a viable solution if you use it to make home improvements to your home that increase the property’s value. This way, you can avoid racking up a large sum of credit card debt or using your home as collateral.
On the other hand, personal loans are not the right solution if you are simply using the funds for unnecessary discretionary spending, such as taking a vacation. Good financial habits are vital to resisting the temptation of a lump sum of cash deposited into your bank account, as well as responsibly using the funds for which they were intended and paying them off on time every month.