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Types of Personal Loans and How to Apply

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What is a Personal Loan?

When you borrow money from a bank, credit union or online lender and pay them back monthly with interest on a set term, that's called a personal loan. There aren't any requirements on how you need to use the money, but most people use personal loans to consolidate credit card debt, pay off student loans, pay for medical emergencies, weddings, and more.

Choose a personal loan that best fits your situation and compare rate offers from different lenders. Look at each one long term to make sure you're not paying back more than you originally borrowed. The lower the rate the better. Here are some types of personal loans, how to get a personal loan, and more helpful information.

Types of Personal Loans

An unsecured personal loan is the most common. You don't have to provide any collateral such as a car or home to receive this loan. However, since there is no collateral, lenders usually have higher annual percentage rates, which ranges between 5% and 36%.

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Secured personal loans demand collateral. If you fail to pay back the lender, they will seize your car, home, or whatever you provided as a form of payment and your credit score will go down. Annual percentage rates are typically lower for this type of personal loan.

Fixed-rate loans always have the same rates and payments for each month. This loan is good for people who don't want any surprises on their rates and makes budgeting simple.

Variable-rate loans are connected to rising and falling benchmark rates. Some lenders place a limit on how high the rates can go and APRs are usually lower than fixed-rate loans.

If you don't have a credit history or think you'll get rejected from a personal loan, you can consider to apply for co-signing the loan. Someone with good credit history and financial stability will increase your chances of receiving a loan if they apply with you on a co-signed loan. If you fail to repay the lender, your co-signer will agree to pay. Lenders also offer lower APRs and other financial benefits for good standing co-signers. This loan may put your relationship with the co-signer at risk if both parties do not commit.

When interests from all your debts are getting overwhelming, debt consolidation loans may help. Your various debts will combine and become one. The APR is typically lower, so you can worry less about interest. You make one fixed payment each month.

How to Get a Personal Loan

First, know your credit score. You can use multiple websites to check your own credit score for free, such as Credit Karma and it won't lower your credit score. If your score is on the lower side, wait until you boost up your score and then apply for a personal loan. On-time payments and how much credit you use out of your total credit limit are main factors that affect the score.

Next, calculate your personal loan and sign up to be pre-qualified for a loan. This gives you a better idea of which loans are available to you. Getting pre-qualified won't affect your credit score. If you have a low credit score, not enough work history, low income, too much debt compared to your income, or numerous new credit card inquiries you will most likely be denied to pre-qualify for a loan.

Browse and compare personal loan options from different banks, credit unions or online lenders. Check Nerdwallet.com or Magnifymoney.com. Look at the offers long term. Search for options with low rates and no extra fees. Make a plan on how much you can pay back each month. Create a realistic budget plan to avoid running into debt again. Do research about each institution, read the policies, and call and ask questions before applying.

When you've carefully chosen a lender that best fits your situation and budget, you can apply for a personal loan. Only apply for one. Make sure you have the appropriate documents that the lender requires. The lender will do a hard inquiry which will decrease your credit score by a few points and will remain on your record for two years. If you've been approved, you will go over the terms with the lender and can receive your loan within a week.

Important Terms You Need to Know

Interest rates are set by the lender and depend on your credit score as well as the loan length. For example, if you have a good credit score you will pay less interest each month. If your loan term length is 4 years your interest rate will be lower than if your loan term is 6 years.

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APR includes the interest rate and additional fees that you'll be paying annually. Find a lender with low APRs.

Fees can get out of control, such as the origination fee, late payment fee, prepayment fee, and transaction fee. Seek out a lender with low or no fees. Some lenders may be able to waive all fees.