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What Is a Personal Loan?

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Believe it or not, approximately 78 percent of workers in the United States live paycheck to paycheck. That means covering unexpected expenses can be almost impossible.

And though many people assume that relying on credit cards is the only way to make ends meet, it’s not your only option. Personal loans can help you pay for those surprise expenses more affordably than the standard credit card.

But if you’re asking yourself “what is a personal loan?” don’t panic. Read on to learn everything you need to know about these loans.

What Is a Personal Loan, Anyway?

A personal loan is a short-term loan designed to help you cover unexpected or emergency costs or simply to make ends meet.

They typically have higher interest rates than traditional purpose-created loans like mortgages, auto loans, or business loans. And they come in two main types: secured and unsecured.

Secured Loans

Secured loans get issued for a specific purpose like financing a new car or buying a house. The item you’re buying acts as collateral. And if you default on the loan, the lender will take possession of that item.

Unsecured Loans

Unsecured loans are among the most common personal loans. They’re not backed by any collateral and you can use them for just about any purpose. This makes them the most flexible loan type available.

Regardless of the type of loan you take out, you’re expected to pay back the amount you borrow in full plus any interest earned on the loan. And you’re expected to do it by the end of your loan term.

You’ll know the interest rate and repayment schedule before you agree to accept the loan.

Understanding the Requirements

Every lender has their own requirements. And those requirements largely depend on the type of personal loan you take out.

If you’re taking out a payday loan, you’re expected to have an established job, previous paychecks to determine how much you can borrow, and a valid bank account.

But if you’re borrowing from a bank or taking out a long-term personal loan, you’ll need to have good credit. The better your credit is, the lower your interest rate will be. And the more you’re allowed to borrow.

Keep in mind that bad credit won’t necessarily keep you from getting the loan. It may make it harder to get approved for the amount you want, though.

When You Should Take One Out

People use personal loans for many reasons. And the decision to take one out is solely up to you.

If you feel that you’re having trouble covering unexpected car repairs or need help making rent after you lost your job, it’s something worth considering. But many people also use loans to cover things like home improvement projects or consolidating existing debt into a lower monthly payment.

There’s no right or wrong answer. If you think you can benefit from a loan, consider taking one out.

What to Look for in a Lender

When you’re thinking about taking out a personal loan, you’ll want to do a bit of research into your chosen lenders.

Remember, no two lenders are alike and you’ll want to compare the interest rates and loan terms offered by each one.

But more than that, you’ll want to research their background and make sure they’re a company you can trust. Read up on the companies online and check out online reviews like this one for CashNet USA and make sure they’re reputable.

If most people are happy with their services, you’ll likely have the same experience.

What You Need to Know About Personal Loans

Personal loans are a big commitment. And they’re something you’re expected to pay back in full. Before you take out a loan, make sure you’re prepared.

You Don’t Have to Borrow the Full Amount

Even if you’re approved for a certain amount, you don’t have to take out the full loan. In fact, doing so will increase your debt and you’ll end up paying more in interest for the life of the loan.

Instead, only borrow what you need. If that’s a quarter of the amount that you’re approved for, that’s fine!

Remember, your loan approval amount is the maximum they’ll give you, not the minimum you can accept.

Make Sure You Ask About the Terms

Every lender is different. And the terms they offer you will vary. Before you sign anything, make sure you understand what’s expected of you.

Ask the lender about the terms of the loan, the repayment expectations, and the interest rates. You’ll also want to ask about any hidden fees associated with the loan.

Unfortunately, some lenders charge loan origination fees, administrative fees, and even early repayment fees. Worse, they’re not always upfront about what those fees are. In some cases, they can be hundreds of dollars.

After getting the breakdown of the terms, only sign the paperwork if you’re comfortable with the terms. You’re not obligated to take the loan just because you’re approved.

Be Prepared to Make Payments Immediately

Missing payments on your loan is the easiest way to hurt your credit and increase the interest you owe. Make sure you’re able to make payments on the loan before you take it out.

That means you’ll want to think about your budget before you agree to the loan terms. If the monthly payment won’t put a strain on your current budget, it’s worth considering taking the loan. But if you’re worried that you won’t be able to afford the payments, walk away.

The last thing you want to do is get trapped in a vicious loan cycle just to make payments on your debts.

Final Thoughts

If you’ve been asking yourself “what is a personal loan?” this guide should help you better understand what to expect. Just remember, personal loans are a great way to help you pay for things when you’re short on funds.

But that doesn’t mean you should rely on them. Doing so will put your credit score at risk and can hurt your finances in the long-run.

Looking for more helpful advice on improving your finances? Check out our recent posts.

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