A personal loan is a finance product that allows you to borrow a fixed amount of money that you pay back in regular installments. Personal loans are a way to borrow money that is often more flexible and affordable than a credit card. The application and approval process can be quick and easy, making it a good way to pay for large unexpected expenses as well as planned ones.
When would you use a personal loan?
The main benefit of a personal loan is that there are various expenses you can use it for. A personal loan can be used for a variety of reasons, but common situations include:
- Planned life events (such as weddings and moving home)
- Consolidating debt (taking higher-interest debts and refinancing them into a singular lower interest rate or a more manageable monthly payment)
- Medical expenses/bills (you can also use a personal loan to pay insurance deductibles)
- Paying for home improvements or renovations
- Unexpected life expenses (major car repairs, losing a job, funeral costs, vets bills can all be covered with funds from a personal loan)
Types of Personal Loans
There are two types of personal loans that you may be offered, secured and unsecured. Both types of loans work in the same way – giving you the ability to apply for a fixed sum of money that you repay over a set period, but they can come with different interest rates and borrowing levels.
When a loan is ‘secured’, it has been linked to an asset, known as collateral. If you were to default on the repayments of a secured loan, the lender could repossess the item used as collateral to cover the remaining money owed to them. As a result, secured loans can sometimes offer a lower interest rate and higher loan value as the loan is seen as a lower risk to the lender.
Unsecured loans can offer a slightly higher interest rate and loan amount in comparison but are lower risk to the customer as none of their property is liable for repossession should they default.
How To Get a Personal Loan
The application and approval process for a personal loan via a bank or financial institution is pretty straightforward. You can apply online with some basic information to determine your eligibility for a loan and get a quick response as to how much you will likely be able to borrow and at what rates/terms.
Each financial institution will have different criteria that are needed to determine if you are eligible for a loan, but in general, most will look at the following:
- Your financial history (including your credit history and if you have ever declared bankruptcy)
- Current source of income
- The reason for the loan
- The value of any collateral (if taking out a secured loan)
- Your state of residency
The next step is to connect with a loan specialist to confirm and verify your information, discuss the options available to you and draw up a loan agreement. Once you have reviewed and signed the loan agreement, the lender can deposit your money into your bank account.
The whole process from application to approval for a personal loan can often take just one day to complete. Before you even apply, some lender may let you see if you prequalify for a type of loan or amount with no impact on your credit score.