September 17, 2021
Need money for a wedding? Want to refurbish your home? Have a few credit cards to pay off?
If you answered yes to one or more of these questions — or you could use some cash for countless other expenses or purchases — you may want to consider a personal loan.
Here are 10 common questions to help determine if one is right for you.
- What Can a Personal Loan Be Used For?
- Can I Use a Personal Loan to Pay Off Credit Card Debt
- Are There Penalties for Paying Off My Personal Loan Early?
- Do I Need Collateral to Take Out a Personal Loan?
- What Personal Loan Fees Should I Know About?
1. What Can a Personal Loan Be Used For?
The beauty of a personal loan is that you can use it for just about anything. Some of the most common uses include:
- Debt consolidation
- Home improvements
- Medical bills
- Major purchases
- Moving expenses
So, if you're looking to replace those dated appliances in your kitchen with stainless steel or you want to finance that family vacation to Tahiti you've been dreaming about, a personal loan just might fit the bill.
Saving for a vacation is easy if you start early and deposit often.
2. Can I Use a Personal Loan to Pay Off Credit Card Debt?
Absolutely. In fact, more than half of borrowers apply for a personal loan to pay off high-interest credit card debt and refinance it at a lower rate, according to these survey results. Combining multiple monthly expenses into a single, more manageable bill may help you improve cash flow and boost your overall financial situation.
3. Are There Penalties for Paying Off My Personal Loan Early?
As curious as it may seem at first blush, some lenders charge a penalty — usually 2-5% of the original loan amount — if you pay off your loan early. The reason? Money.
When you satisfy your debt before the loan term ends, the lender loses profit they'd otherwise make on monthly interest charges. Prepayment penalties help to offset those losses.
Keep in mind that not all lenders charge fees for early payoffs. So, if you're thinking about repaying your loan before its term ends, read your loan agreement to see if you'll be penalized.
More than half of borrowers take out a personal loan to pay off high-interest credit card debt and refinance it at a lower rate.
4. Do I Need Collateral to Take Out a Personal Loan?
Most personal loans are unsecured, which means you don't have to provide collateral, like a house or car, to guarantee the loan. However, without the security of collateral, the lender may charge a higher interest rate than they would for a secured loan. The silver lining: you won't lose any assets if you miss payments (although your credit score will take a hit).
5. What Personal Loan Fees Should I Know About?
When you take out a personal loan, you'll have to pay interest on the money you borrow and any fees outlined in your contract. These typically include:
- Origination Fee: A one-time, up-front charge some lenders assess to process your loan and pay out the funds.
- Prepayment Penalty: An optional fee some companies impose if you pay off part or all of your loan before the term ends.
- Application Fee: A small, up-front cost (usually $25-50) some lenders charge to review your personal loan application.
- Late Payment Fee: A flat-rate or percentage-of-payment fine that loan companies apply if you don't pay your monthly bill by the due date.
- Non-Sufficient Funds (NSF) Fee: A penalty most lenders assess when you try to pay your bill using an account that doesn't have enough cash in it to cover the entire payment.
Keep in mind that many fees are negotiable. Aside from penalties for late payments and insufficient funds, most other charges can be waived.
Discover how a personal loan can help you build good credit.
6. Do I Qualify for a Personal Loan?
Lenders decide whether you qualify for a personal loan based on your credit history and how confident they are that you'll repay the money you borrow. When reviewing your application, they'll consider:
- Credit Score: This three-digit number, which ranges between 300-850, provides a snapshot of your creditworthiness. Typically, you need a credit score of at least 580 to qualify for a personal loan.
- Credit History: Your credit report provides a detailed record of your borrowing and repayment history, including whether payments were made on time, late, or missed altogether. The fewer negative marks on your credit report, the better.
- Verifiable Income: You'll need a job to qualify for a loan. Documents such as pay stubs, bank statements, and W-2s prove you have a steady source of income and that you earn enough money to repay what you borrow.
- Debt-to-Income (DTI) Ratio: Calculated by dividing your total monthly debts by your gross monthly income, your DTI ratio is used to determine if you'll be able to afford your loan payments. A DTI ratio of 30% or less is considered good.
If your credit is poor or you have little-to-no credit history, you may need a cosigner in order to qualify. A cosigner agrees to take legal responsibility for repaying the loan if you aren't able to make payments.
7. How Much Money Can I Borrow With a Personal Loan?
Limits for personal loans generally range from $1,000 to $100,000. However, the actual amount you'll be able to borrow depends on the lender and the types of financial products they offer, as well as the credit, income, and debt factors used to determine if you qualify for a loan.
What you should really ask yourself is how much can you afford to borrow. It does you no good to take out a loan to consolidate your credit card bills or pay for a new screened porch if you can't make the monthly payments. Late or missed payments will damage your credit and make it harder to achieve other financial goals.
What you should really ask yourself is how much can you afford to borrow.
8. What is the Average Personal Loan Rate?
Interest rates for personal loans vary among lenders and are largely impacted by your credit score, income, outstanding debt, and other factors. That said, the average rate for 24-month personal loans has ranged between 9.5-10.3% since 2016.
9. How Many Personal Loans Can I Have at Once?
There's no hard and fast rule about how many personal loans you can have at once. If you need the extra money and can find a lender, go for it — provided you can afford the payments.
The bigger challenge may be qualifying. Some lenders don't allow borrowers to have more than one personal loan. Others may approve you for a second or third loan, provided the additional debt doesn't push your DTI ratio past the percentage they consider acceptable.
In either case, applying for multiple personal loans in a short period of time is a red flag for most lenders. They may see it as a sign that you're trying to take on large amounts of debt because you're in financial trouble.
Learn how to streamline your liabilities with a personal loan for debt consolidation.
10. How Much Do I Have to Pay Each Month for a Personal Loan?
Since most personal loans are fixed-rate installment loans, you'll pay the same amount each month over the course of one to 10 years. The lender will calculate your monthly payments based on:
- The amount you borrow
- The interest rate for the loan
- The length of repayment terms
If you're wondering how much it would cost if you borrowed money to remodel your bathroom or pay for other home improvements, plug some numbers into a loan calculator. This will allow you to estimate and compare monthly payment options.
A personal loan is one of the easiest and most popular ways to borrow money. It's also a big commitment that will impact your financial way of life for years.
By taking your time, doing your research, and making wise decisions, you can find a loan that meets your immediate needs and works with your long-term plans and budget.
No question about it.