A personal loan is a loan taken out with a financial institution, such as a bank, credit union, or online lender. These types of loans are typically unsecured, meaning you don’t use collateral to qualify or back the money. They are usually a little more expensive than secured loans because the institutions don’t have much recourse if you are to default. However, the interest rates are often cheaper than those for credit cards, so they’re sometimes a better option when you’re in a bind. If you do decide to apply for a personal loan, here’s what you need to know.
Your credit score is a big factor
Because personal loans are unsecured, the main factor your lending institution will check is your credit score. And for the same reason, they often require higher scores to qualify. Most institutions use your FICO score to determine your creditworthiness. And although they each carry their own set of criteria, any score above 700 is usually considered good. But having a lower score does not necessarily mean you won’t qualify. It may just mean that you will be charged a higher interest rate. It’s a good idea to check your own credit before you apply for a personal loan so you know what you are dealing with. And if your score is a little lower than ideal, you might want to start at an institution such as a credit union in Covington, LA. Credit unions often have more reasonable terms and various options for these types of loans.
Other factors your bank will consider
Even though your credit will probably play the biggest role in your ability to secure a personal loan, there are a few other factors they might consider. For example, college students can sometimes receive discounted rates or special incentives. So, if you are enrolled in any accredited liberal arts degree programs or other college programs, be sure to mention that to your loan officer. Other factors that may be considered include the amount of your income and whether or not you have a cosigner. A cosigner can make a big difference in the amount of interest you pay if he or she has better credit than you. This is also a good way to get started with building a solid credit history right after college.
Risks of personal loans
Although personal loans can be a great asset for responsible borrowers, we’d be remiss if we didn’t mention some of the risks. For one, because they are not secured by any collateral, defaulting does not mean you will lose an item you used to secure it. However, your lending institution would be within their rights to take you to court and sue you for the remainder of the loan amount. In these cases, your credit is damaged both with defaulted payments and possible court judgments. Not to mention, you’ll be out even more money for court and attorney fees.
Another risk of a personal loan is early payoff penalties. Be sure you are aware of the terms of your agreement before you sign it. If you’re expecting to pay it off early and save some interest, you might be surprised if find out that your institution charges hefty fees for that. Some lenders also charge you upfront fees and precomputed interest, meaning that you will pay that amount no matter how soon you pay it off. All this is to say that as long as you check into your lender’s terms before signing the papers and make your payments, your personal loan could be a great way to fund your future and build good credit.