Sometimes we all need a little cash boost. Whether it's to cover bills, property renovations or a luxury purchase, a personal loan could be exactly what you need.
A personal loan is money you borrow from a lending institution - be it a bank, credit union or other third-party lender - which you then pay back over a pre-agreed fixed period of time.
Personal loans have a repayment period ranging from 3-60+ months, commonly categorized as long term or short term loans.
Although a longer repayment window may seem appealing as it eases the financial burden, it is worth remembering that the longer the repayment lasts, the more interest will have to be paid. For this reason, short term loans have gained massively in popularity over recent years.
A personal loan will also come with Annual Percentage Rate (APR) this combines; charges, fees (+associated fees) and payments to tell you what your loan will cost you per year. The lower the APR, the cheaper the loan and the less you pay off in the long run.
Rates will vary from lender to lender, and most will generally range from cheap loan rates of 4.99% up to more expensive loan rates of 35.99% where it is capped. By law, all lenders must provide you with an APR, which will include any fees they have.
Although the requirements for a personal loan vary from lender to lender, it is essential that you meet the criteria listed below:
The world of personal loans can be quite confusing, especially with the inclusion of complicated financial jargon. To make things a bit easier to understand, below we've put a list breaking down exactly what type of personal loans are available.
The only difference between unsecured loans and secured loans is that a secured loan requires collateral. This can come in the form of a home, vehicles, stocks, bonds and cash.
Although it is safer for you personally to choose an unsecured loan it is the total opposite for the loan lender. As such you will be faced with harsher interest rates to cover the risk to the lender. On the flip side, if you are looking for a cheap loan then a secured loan could be the answer.
P2P Loans, also known as 'social lending' or 'crowd lending' cut out the middle man, in this case the bank/credit union and connects you the borrow directly with lenders online.
If your credit is bad or you lack assets as collateral this could be your best bet for a personal loan.
P2P loans will generally include fees such as origination fees which range from 0.5% - 5% of the loan.
Late fees from a P2P loan can be expensive so proper budgeting is essential if you're going down this route.
Interest rates tend to be around 15% with P2P loans.
Fixed rate loans as the name suggests will come with a rate that is consistent or 'fixed' throughout the entire of the agreed repayment time.
This can help with budgeting as you will know exactly how much you have to pay back every month.
A variable loan however, will have rates that fluctuate to reflect market conditions.
The initial rates may start off lower than those on a fixed rate loan but are susceptible to change and could end up being more expensive.
Typically, unsecured these can be used for any purpose so interest rates tend to be high although lower than a credit card.
A benefit of a line of credit is that you only owe on what you spend.
Short term loans tend to offer a repayment period of 3-12 months (although some lenders can offer less). Short term loans have superseded what used to be more commonly known as a payday loan. Short term loans tend to me more expensive than a standard personal loan and are typically used in an emergency to bridge a short financial gap.
Also known as a 'good faith loan' or 'character loans', a signature loan is an unsecured loan that only requires your signature. With no collateral, rates tend to be high.
A cash advance loan is taken against the credit line on your credit card and will be included with additional fees as well as interest.
It is possible to transfer debt from one credit card to another with lower interest rates typically for a fee.
The official term for any loan that is repaid over a set period of time with set payments.
A mortgage or auto loan repayment are examples of installment loans.
Typically, unsecured and as the name suggests, are loans that are paid out on the same day. Same Day Loans are only available to applicants who immediately meet the criteria of the lender in terms of affordability and general background checks.
When applying for the best loan to suit your current circumstance it is best to look at either banks, credit unions, online loan brokers and direct lenders.
Banks are the more traditional routes and credit unions offer more flexible loan rates and terms.
If you choose a direct online lender it is highly recommended that you research around them to confirm that they are reputable. Checking how long they have been in operation and their relationship with their customers (checking online reviews) are good starting points for this.
Many direct lenders will carry out a soft credit check during your application process. This wont harm your credit score in any way.
You'll most likely be asked some questions during the application process:
Under no circumstances should you give out any credit card information, especially to an online lender.
When dealing with online loans it is worth remembering that if the deal seems too good to be true then it probably is. This is why it is crucial that you always read the fine print.
There are numerous hidden fees out there that could end up costing your far more than what you bargained for.
Arguably the most important factor when applying for a personal loan.
You'll need to know where your credit score is in the ranges below:
|720 and up||Excellent credit score|
|690 - 719||Good credit score|
|630 - 689||Average credit score|
|300 -629||Poor credit score|
This will be heavily taken into consideration with other factors like debt-to-income ratio and income when deciding on the best loan that you will be eligible for (good credit or poor credit loan).
The higher the score, the more favorable the terms will be and the cheaper loan offered.
The big three credit bureaus Equifax, Experian and Trans Union offer a free credit check but to include your actual credit score you will have to pay a fee.
Previous loan statements, credit cards or financial institutions will also show your credit score.
If you have bad credit / poor credit most lenders will still provide bad credit loans but at much tougher interest rates and stricter conditions on the loan amount and repayment terms.
If your credit is under 630 it is generally considered a bad credit rating, typically the APR on this score will be 28.5% - 32.0%. In some cases, collateral may be put up to improve the rate.
In addition, many lenders will allow a cosigner. This allows someone with better credit to cosign the loan with you to improve the terms of the bad credit loan. This does however make this person liable so if you default on your payment then their credit score is also at risk.
One of the most important things when it comes to taking out a personal loan is knowing how much you can afford to pay back every month.
Many lenders will have an online loan calculator on their sites that can help plan this for you.
Loan amounts, loan terms, interest rates, credit score and income will all be taken into account when using the loan calculator.
Finding out where you want to get your loan from is a big decision. Below are a few pros and cons to help you determine whether you want to go with the more traditional or online loan lender.
Now you have a bit more of an understanding of how personal loans work you're ready to determine what type of loan will best suit you.
Remember to pay close attention to the APR as well as other fees and make sure that you will be able to keep up with the monthly repayments or you could incur some serious financial penalties.
To search for which personal loan is best suited for you simply click the "Get My Quote" button below and complete our simple online application form, to get your free no obligation same day loan quote.