Personal Loans 101 – Top Tips and What to Watch Out For

Personal Loans 101

Many people turn to personal loans when a situation arises that calls for more money than they currently have at their disposal. Helping a child to pay for a wedding or college or making improvements to the home are just a few examples of why people need a personal loan. Unlike a mortgage or a car payment, an approved personal loan can be used for any purpose and at the borrower’s discretion.

Where to Get a Personal Loan

If a customer already has established bank accounts like checking and savings, starting with his or her own bank when applying for loans is a good idea. Banks want to retain customers, and one way of doing that is by helping them get the money they need. Unfortunately, if an applicant has a bad credit history or has bounced a few too many checks, then his or her own bank isn’t going to automatically approve a loan application. That is when is pays to know one’s options, whether for an unsecured loan or another type of loan.

Unsecured Loans

As the name implies, an unsecured loan is one that is obtained without the benefit of collateral. For this reason, an unsecured loan can be more difficult to get approved than a secured loan. With a secured loan, the lender has the assurance of being able to repossess the borrower’s house, car or another item in the event of loan default. With an unsecured loan, there is no such assurance, so borrowers should expect the qualifications to be stricter and interest rates to be higher.

A credit card is an example of a fast loan that does not require collateral. However, not all borrowers are interested in having a credit card and access to continued revolving credit. If the potential borrower can not get approved for an unsecured loan through a bank or credit union, the next place to look would be an alternative finance company. There are several such companies online and people looking to borrow money can usually find one without too much trouble. With a non-bank finance company, interest rates may be quite a bit higher in exchange for relaxed approval guidelines.

No Credit Loans

Payday loans and car title loans are a way for people with bad credit to obtain a loan without having to go through a credit check. They may also be an option for people with very little credit history. In exchange for the convenience of a fast loan with no credit check or collateral required, the loan rates can be very high. This is true even if the loan is only taken out for a few days or weeks.

With a payday loan, the applicant is required to be employed and make a minimum income as determined by the payday loan company. It is also referred to as a cash advance loan. The application form is very short, and the loan will be approved as long as the lender can verify the information. When the applicant gets his or her next pay check, the loan must be repaid in full with interest. Some payday loan companies set it up so the loan and interest are automatically deducted from the borrower’s checking account on payday.

A car title loan is an option for people who have bad credit and who own their car. Like the payday loan, no credit check is required and it can usually be obtained very quickly. Unlike the payday loan, collateral is required in the form of the borrower’s vehicle, which he or she must own free and clear. To get an auto title loan, the borrower needs to take the car title to a pawn shop and apply for one. The amount he or she will get approved for is directly related to the value of the vehicle.

Considerations When Applying for a Personal Loan

In addition to looking for the lowest interest rate, the potential borrower should look for other repayment terms that fit into his or her budget. This would be things like the monthly payment amount and how long the loans extend. Also, to save the most money in the long run, borrowers should commit to repaying loans as soon as possible.