Personal loans are a common choice for many people who wish to make a large purchase that they cannot afford or put on their credit card. However, are personal loans worth it? Or should you find another way to fund your large purchase? Also read out what you need to know about installment loans.
What Is A Personal Loan?
A personal loan is a loan provided regardless of a specific reason, and paid back in installments.
It may be secured, which means that it’s backed up by collateral that can be taken in the event of default, or unsecured, which requires no collateral.
How Do Personal Loans Work?
You go to a lender and see what their requirements are for a personal loan. The most common requirements are:
- Income verification: This is typical for all types of loans, and is to make sure you have the ability to pay back your loan.
- A bank account: This is usually for pre authorized debit.
- An address: This is to make sure they know how to get back to you in case of nonpayment.
- Credit requirements: Usually, some sort of good credit history and a good credit score is required. However, some lenders provide these loans without a credit history, or will offer ‘bad credit’ loans. Know how to establish new credit without a credit history?
Most personal lenders will deposit the money directly to your bank account, however some operate differently. They may give you a prepaid cards, an online money transfer, or just cash or a check.
Paying back the loan happens in installments, and typically they will require you to provide bank account information so they can initiate pre-authorized debit. This automatically takes money from your bank account to pay the loan. Not all lenders do pre-authorized debit, though. They may require payments to a specific address.
What Kind Of Interest Rates Can You See?
Interest rates vary widely! They depend on two things:
- Your credit: If you have good credit, you will get a lower interest rate. There are some pretty cool stats on credit scores.
- The lender: Personal loans are offered from many different types of lenders, from banks to payday loan companies. Depending on where you get your loan, and how they expect you to guarantee the loan, you will have a different interest rate.
However, an unsecured personal loan is usually lent at a high interest rate, typically just slightly lower than that of a credit card. Lenders that don’t require credit verification or are marketed to those with bad credit will often charge much higher interest rates!
Dangers of Personal Loans
High interest rates:
you may end up paying astronomical interest rates: we’re talking in excess of 100% APR. Some rates you may pay are not legal in the United States, but because they’re run by Indian reservations or other sovereign countries, you may still have to pay them.
late fees and administrative fees can be tacked on. Read the loan agreement and make sure that all fees are laid out properly, and that you understand the charges and interest rates.
they will take payments automatically, and they may tack on fees that you may not expect. This money is then taken from your bank account, and the only way to get it back is to dispute it. This is difficult with pre-authorized debit.
So, Are Personal Loans Worth It?
In most cases, not at all! The interest rates are too high (even when provided by a bank) and there are usually better ways to get a loan.
However, if you absolutely need the money, and you know exactly how you’re going to pay the loan back, then a personal loan may be your only option.
Do you have no credit and want to start a credit history? Look into secured credit cards! We wrote an entire article about it: build credit with secured credit cards!