A personal loan can be a viable way to consolidate debt, pay medical bills or even go on vacation, provided you have a solid plan in place for repaying the loan. Unlike using a credit card, a personal loan granted by a bank offers a fixed interest rate and fixed repayment period.
If your credit is good, almost any bank or credit union will consider giving you a personal loan. However, the lowest interest rates are often found at credit unions.
Two types of personal loans
There are two primary types of personal loans:
- Personal line of credit. A personal line of credit gives you access to a specific amount of money, limited by most banks to between $5,000 and $10,000. Every time you repay money borrowed you can borrow it again without having to apply for a new loan. Interest is charged only on the amount you have borrowed, not your total available credit.
You can normally access funds through check, an ATM card or through an internet transfer. You begin racking up interest as soon as money is withdrawn. There are a couple of caveats associated with a personal line of credit: The interest rate is often high and it is likely you will be approved only if you have strong credit.
- Debt consolidation. If you are looking to pay off debt but want a bank to disburse the money for you, it makes sense to apply for a debt consolidation loan. The interest rates on a debt consolidation loan vary greatly, depending on your credit score. The higher the score, the lower the interest rate.
Before you apply
Walking into a bank and getting a loan approved is not always easy. There are things you can do to help yourself through the process:
- Know what you want and be realistic. Determine why you are taking out a personal loan and exactly how much you need. For example, if you want to pay $3,000 worth of medical bills, go into the loan process with that number in mind. The bank wants to know that you are sure of why and how much you are borrowing. And don’t ask for more than you can easily repay.
- Check interest rates. Before you apply for a loan, find out what the interest rates are. Compare the rates among banks in your area. You may not need to do your banking at a particular institution in order to get a loan there.
- Ask about paperwork and fees. As soon as you find the bank with the rates and terms most attractive to you, ask to speak with a loan officer. Find out about loan requirements upfront, including which documents you will need to provide. Find out whether there are other fees with the loan, including an origination fee or prepayment penalty fees, and whether insurance is offered with the loan.
- Know your credit history. Order and review a copy of your credit report well in advance of applying for a loan. Check it for accuracy and dispute any mistakes with the credit bureau. Lenders pull credit reports from different agencies, so make sure you get your reports and credit scores from all three major credit bureaus: Equifax, TransUnion and Experian. You are entitled to one free credit report from each agency per year.