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Applying for a loan can be scary. With economic uncertainty and inflation on the rise, many people have turned to personal loans. Personal loan debt in America is higher than it has been in 17 years, with 20 million Americans owing a collective $178 billion in the first quarter of 2022.
However, debt should never be taken lightly. Many potential borrowers have fears about taking on personal loan debt. If you are considering a personal loan but are spooked by the risks, you can keep some tips in mind to help you find the right option.
Top questions causing financial stress
A personal loan can be a great way to cover a large purchase, consolidate debt, or pay emergency expenses. A personal loan can also help you build your credit by bolstering your credit mix and positive payment history. However, taking on debt is always a risk, and taking out a personal loan can amplify your financial stress if you aren’t careful. Before taking out a personal loan, you should consider the benefits and risks of taking out a personal loan, and you should make sure you understand the process.
What is the benefit of obtaining a personal loan?
Taking out a personal loan comes with the inherent risk of taking on debt and potentially high interest rates and fees, especially if you do not have good credit. However, personal loans have benefits over other lending products and can be a great way to consolidate debt or cover a major expense.
Borrowing limits on personal loans tend to be higher than other lending products. On average, personal loans also have relatively lower interest rates than credit cards, allowing borrowers to access more capital with less added cost. Another benefit to personal loans is that they typically have fixed interest rates and repayment terms. This means that your payments will be predictable throughout the life of your loan, taking any guesswork out of the budgeting and payment process.
You can also build up your credit score with a personal loan and making regular, on-time payments. This will also help you diversify your credit mix, especially if you don’t have other loans.
A personal loan is especially helpful if you want to consolidate debt. Debt consolidation is one of the most popular reasons to take out a personal loan. Debt consolidation is the process of combining multiple high interest debts under one new, lower interest loan. Since personal loans typically have lower interest rates and longer repayment term options than other forms of credit, they are a popular way to consolidate debt. If you are considering a personal loan for debt consolidation, make sure that you qualify for a lower interest rate than you are currently paying before making a decision.
How can you get a loan with no credit?
The process of getting a loan with no credit is not any different than getting a loan with credit. However, it is much more difficult to do, and you are unlikely to qualify for a lender’s best interest rates.
Personal loans can be obtained through banks, credit unions and private lenders. While most lenders have minimum credit score requirements to qualify, some lenders accept borrowers with bad credit or little credit history. Bad credit loans tend to have more lenient requirements to qualify, and many have reasonably low rate caps to avoid extremely high rates. However, these loans tend to have higher interest rates and stricter loan terms, especially if you have bad credit.
Make sure you know exactly how much you will pay in interest and fees before signing up for a loan. Many lenders allow you to prequalify without hurting your credit, which is a good way to see what terms you’ll be eligible for without making any commitments or damaging your credit score with a hard credit check.
How do you fill out a personal loan application?
Before you can get a personal loan, you have to fill out a loan application. You should come prepared with some of the information lenders typically require, such as your annual income, employment status and financial history.
The application process will likely occur online if you work with a private lender. If you work with a bank or credit union, you may be able to get an application online, in person at a branch or over the phone, depending on the lender. To determine your eligibility, the lender will need basic information like your driver’s license, address, social security number and income. Additional information a lender may request includes employment information, asset information, and liabilities or debts. You will also need to decide how much money you want to borrow and list that number on the application.
Once you have submitted your application, it can take up to a week to be approved, depending on the lender. However, some lenders offer next-day and even same-day approval, especially if you apply online. Before applying, ask the lender for their specific timeframe so you know what to expect.
How long does it take to get a personal loan?
The time it takes to get a personal loan varies significantly depending on the lender you choose and the complexity of your financial profile. Banks and credit unions tend to have slower turnaround times than online lenders. Banks generally have the strictest eligibility requirements because they are more highly regulated. Credit unions tend to have less strict requirements, but you must be a member to apply for a loan. Both options can take anywhere from a couple of days up to 5 days to issue funding after loan approval. Online lenders are both the most flexible and the quickest option. Online lenders tend to offer a wider range of loan purposes, and many online lenders offer funding on the same day as approval.
What can be used as collateral for a personal loan?
Most personal loans are unsecured, meaning that they do not require collateral. Collateral can be any valuable asset that you put up to secure your loan. Common types of collateral include homes, vehicles, stocks, bonds, expensive items, future paychecks and savings. If you fail to repay your loan, you will lose your collateral.
While personal loans are often unsecured, secured personal loans are out there. These loans tend to have better interest rates since they are secured, but they are risky since you could lose valuable assets if you default on the loan. It may be worth taking out a secured loan if you are confident you can pay the money back without any issues. However, unsecured personal loans are much more common because they generally involve less risk. Despite having higher interest rates than secured personal loans, unsecured loans do not come with the risk of losing any assets, making them generally much safer.
The bottom line
While applying for a personal loan can be nerve-wracking and comes with some risks, many great lenders can get you the money you need and help you build your credit along the way. Before applying for a loan, you should always make sure you understand the process, the steps you need to take and what you can expect from lenders. It is important to shop around and compare rates before choosing a specific lender, and it is always better to err on the side of caution when considering a credit product.
If you need a personal loan but the process feels overwhelming, it is always worth researching and reaching out to a financial advisor if necessary. While personal loans can be a great asset, taking on debt can be scary. Make sure you feel prepared and comfortable before taking the leap.