Applying for a personal loan can be a big financial step when done right. With relatively low interest rates and easy approval processes, personal loans can help you boost your financial position. However, like any other form of debt, you should be careful when applying for one. Manage your loans incorrectly, and you may end up making your situation worse.
Applying for a personal loan is simple and straightforward. However, before you choose to apply, you should keep a few things in mind. Here are 4 characteristics of personal loans that you should know when applying for one.
Rehabilitation is easy
Most financial institutions place lower qualification barriers on personal loans than other forms of debt. Thus, you will find that these loans have fast approvals and fewer application restrictions. Interest rates also tend to be lower than comparable debt.
For example, interest rates on personal loans are much lower than what you’ll find on credit card debt. With relatively low interest rates, personal loans are a great way to reduce your interest burden by swapping out higher interest debt at a lower rate. Usually, banks set interest rates and terms to help you pay off the debt within 7 years (84 months).
Interest rates are usually fixed, unlike mortgages that can have variable rates. These fixed rates mean that your monthly payments are predictable, and you can easily budget for them. In many cases, lenders do not impose early penalties or prepayment penalties, which is prevalent with other forms of debt. In addition, you can apply and qualify for a personal loan even if you have other forms of outstanding debt with your bank or financial institution.
Overall, with quick and easy approvals, personal loans offer an impressive array of features if you’re looking to consolidate or reduce your debt burden.
Apply for what you can afford
While the approvals are simple, this does not mean that personal loans do not have flaws that can make your personal financial situation worse. It’s still a form of debt, and you should plan carefully how the money will be used and what your monthly interest payments will look like.
You don’t need a perfect credit score or rating to apply, but defaulting on your personal loan will definitely make your score worse. It’s best to look at your current monthly debt payments and replace them with your personal loan payments.
The more you borrow, the higher the interest rate. Always keep your financial goals in mind before applying for a loan and stick to your plan.
Use it to finance business
Personal loans are not only used to pay off personal debts. They can also provide capital flow for your small business or startup. Many entrepreneurs prefer to use personal loans as start-up capital because most new businesses are not eligible for bank financing.
Even small established businesses face significant hurdles in obtaining financing, as banks demand high capital reserves and unrealistic revenue records at the border. Many small business loans do not offer a lump sum. Instead, proceeds are released periodically once invoices and other documents are submitted.
Thus, personal loans provide a great way for business owners to fund their ideas and get started. Most personal loans do not require collateral to secure the loan, which makes them a better option. You will receive a lump sum which you can use in any way you want. However, there are some downsides to using personal loans for business purposes.
First, your business credit score does not improve when you use a personal loan. After all, the debt lies in your name, not your business. Second, while small business loans are painful to apply for and qualify for, they provide larger amounts for business use. Thus, if your financing needs are high, a personal loan will not be the best option.
Despite this, personal loans are an excellent option for almost all other purposes.
Shop for the best terms
These days, online lenders have taken a large part of the personal loan business away from traditional banks. Consumers have benefited greatly from this move since online lenders use many other credit scoring models than the old credit scoring model.
Online lenders can offer more flexible terms and even allow you to crowdsource funds. Platforms like Prosper offer a range of options for people looking to source funds for any purpose. Interest rates are fixed based on special credit models. You should not expect miracles from these lenders, however, they can offer much better terms than traditional banks.
Qualification is straightforward, and approvals usually take around 48 hours or less. Defaulting on these loans will affect your credit score, so don’t think this money is free money.
Great financing option
Personal loans are just one of the many financing options available, but they are the best for achieving certain goals. If your goal is to reduce your debt burden and borrow relatively low amounts of money, personal loans are your best option. Remember to review the terms of the loan, and you will be able to strengthen your financial position immeasurably.