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By Sarah Klein — Published April 09, 2018
If you're short on cash for a large expense or want to consolidate your debt, a personal loan could be a good choice for you. Personal loans can be used to renovate your home, pay for an unexpected car expense, or even for that next vacation. Personal loans are typically available through banks, credit unions, and now online lenders as well. You receive the money in one lump sum and pay it back over a fixed period of time. Here are the top things that you should know before taking out a personal loan.
Personal loan affordability depends on your credit score.
Your credit score is going to affect how affordable your personal loan is going to be. If you have a high credit score, the interest rate on your personal loan can easily be lower than that of a credit card. A lower interest rate for your personal loan will result in less money being repaid over time. An excellent credit score is usually above 750 whereas a bad credit score tends to be below 600, though lenders can rank credit scores a little differently.
Both the repayment time and the interest rate are fixed.
Interest rates are fixed throughout the course of the loan. This means that you can expect to make the same payment every month. Typically, interest rates range from 6-36%, depending on your credit score. The repayment period is also fixed, usually between two and five years. Whereas a longer repayment time can lower your monthly payment upfront, you can pay more in the long-run in this scenario due to accruing interest.
Personal loans can be secured or unsecured.
Personal loans can be secured or unsecured, though unsecured loans tend to be more popular. Secured loans use a borrower's asset (such as house or car) as collateral. This means that if you default on your loan repayment, the lender can go after your property. Unsecured loans, on the other hand, are based on your financial history. A secured loan typically has a lower interest rate, however putting your home up as collateral is risky.
There could be extra fees.
Be aware that there could be extra fees when you take out a personal loan. One type of fee is the origination fee, which some lenders charge to process the loan. Some lenders may try to convince you that you need personal loan insurance, so that your debt won't be passed on to a loved one in the event of your death during the repayment period. A prepayment fee can result in you being charged for paying off your debt before the end of the fixed repayment period. Make sure that you understand any potential fees upfront when you take out the loan.
Beware of scammers.
If you go to a brick and mortar bank or credit union, the chances of you falling victim to a scam are low. A lot of people opt for the easier, less time-consuming option of securing a personal loan online though, and this is where you need to be careful. Some scammers may ask for a prepaid debit card or for you to wire money for an advanced fee, and then never give you the agreed upon loan. Another sign of a scammer is a company that says they do not rely on credit checks. You can check out any potential lenders on the Better Business Bureau's website before giving out your personal information to an online lender.
Personal loans can be a convenient way to pay for an expense, whether unexpected or planned. When taking out a personal loan, always make sure that you go through a reliable lender. Be aware that your credit score will play a role in the affordability of your loan since it will affect the interest rate offered to you. Both the repayment time and the interest rate will be fixed (rather than variable) over the life of the loan. A longer repayment period will lower your monthly payment, however you'll accrue more interest so will pay more in the end. You will most likely want an unsecured loan, but secured personal loans are also an option. Finally, make sure you understand any extra fees up front and what is optional that you can avoid.