How to Evaluate a Personal Loan
A personal loan is a form of credit that can be used to finance large purchases or pay down debt. It can be obtained from banks, credit unions, consumer finance companies and online lenders. When managed responsibly, personal loans can have positive impacts on your credit score and debt profile.
Interest rates
Personal loans can be an attractive option for financing big-ticket expenses, such as buying a new car or furnishing your home. However, it’s important to consider the impact of interest rates when deciding whether a personal loan makes sense for you.
A lender’s interest rate is based on a variety of factors, including your creditworthiness and how you plan to use the loan funds. Borrowers with high credit scores and a solid history of making payments on time typically qualify for lower rates.
You can also improve your chances of getting a low interest rate by keeping your credit score in good standing and paying off debt to reduce your debt-to-income ratio. Additionally, many banks and financial institutions offer special rates during festive periods that can reduce the amount of EMI you pay. You can also negotiate with your bank for a lower rate. Moreover, you can compare interest rates offered by different NBFCs and banks before applying for one.
Fees
Personal loans come with a variety of fees, but they don’t have to. Many lenders offer personal loans without origination fees or late payment penalties. However, if a lender does charge these, it’s important to consider how much those fees will add up over the life of the loan.
An origination fee is a one-time upfront fee that’s added to your loan to cover the cost of processing it. It’s usually a percentage of the amount you borrow, and it can be rolled into your loan or subtracted from the money you receive when the loan is disbursed to you.
Other types of fees can include a dishonored payment fee (if you make a payment that’s not honored), prepayment penalties and application fees. These aren’t typically common, but it’s good to be aware of them so you can compare lenders and choose the best options for your unique situation.
Repayment terms
When evaluating personal loans, you should always pay close attention to the terms. These include the interest rate and fees. In addition, you should also consider the payback period and whether there are prepayment penalties.
The loan term can impact how much you pay each month and the total amount of interest you’ll pay over the life of the loan. Different lenders offer varying repayment periods. If you choose a shorter-term personal loan, your monthly payments may be higher but you’ll save on interest costs over time.
Another important factor to consider when shopping for personal loans is the loan approval process and how long it takes to receive funding. Online lenders typically offer the fastest approval times and can deposit funds the same day you’re approved. This is a big contrast to traditional banks and credit unions, which can take days or weeks to approve a personal loan application. They also typically require a minimum credit score and income threshold to lend money.
Types
Personal loans are available from a wide range of lenders, including banks, credit unions, and online lenders. They can be secured or unsecured, and are typically paid over a term of one to seven years. They can be used for almost any expense, from paying off existing debt to taking a vacation.
Secured personal loans require an asset to be pledged as collateral, such as a car or house. This reduces the risk to the lender and allows for a lower interest rate. Unsecured personal loans are based on the borrower’s creditworthiness and may have higher rates.
A personal line of credit (PLOC) is a type of personal loan that has a set credit limit that you can tap into on an as-needed basis. These loans are usually reported to the credit bureaus on a monthly basis and can help build your credit score if you make consistent payments. However, they can also be costly if you carry a balance for an extended period of time.
