When it comes to financing large expenses, such as remodeling a home or consolidating debt, a personal loan can be a great option. Interest rates may be lower than on credit cards, and you won't be limited to how you use the money. But before you apply for a personal loan, it's important to understand how they work and when they should be used. Founded in 1976, Bankrate has been helping people make smart financial decisions for more than four decades.
We demystify the financial decision-making process and give people confidence in their actions. Personal loans are borrowed money that can be used for large purchases, debt consolidation, emergency expenses, and much more. These loans are repaid in monthly installments over the course of a few months or more than a few years. It may take longer depending on your circumstances and the diligence with which you make payments.
After you are approved for a personal loan, the funds you receive will be deposited into your bank account in a lump sum. The transfer can take as little as 24 hours or a few weeks, depending on the lender. Debt consolidation is one of the most common reasons to apply for a personal loan. When you apply for a loan and use it to repay multiple loans or credit cards, you're combining all of those outstanding balances into one monthly payment. This pooling of debts makes it easier to set a time frame for paying your balances without feeling overwhelmed. If you need money for an emergency, using a personal loan instead of a payday loan can save you hundreds of dollars in interest charges.
According to the Federal Reserve Bank of St. Louis, the average APR for a payday loan is 39.1 percent, while the maximum interest rate on a personal loan is typically 36 percent. Personal loan funds can help you move your household belongings from one place to another, buy new furniture, transport your vehicle across the country, and cover any additional expenses. Using a personal loan for moving expenses can also help you stay afloat if you move somewhere without work. This way, you can avoid looting your savings or emergency fund. You will need to start paying the loan company in monthly installments within 30 days.
Most lenders offer repayment terms between six months and seven years. Both your interest rate and your monthly payment will be affected by the length of the loan you choose. A personal loan can be used as a form of debt consolidation, especially with credit card debt. It's also a popular reason people apply for a personal loan. Personal loans charge lower interest rates compared to credit cards, especially if you have good credit.
The best personal loans charge an interest rate as low as 4%, well below the double-digit percentages that most credit cards charge. You can apply for a personal loan, pay off your outstanding credit card balance, and then make a payment to your new personal loan servicer. If you move close to where you live now, you may not need to cover any major expenses. But if you're moving out of state, you may need extra money to pay for moving costs. Moving far away means covering the cost of packing your belongings, possibly hiring removals and transporting your things to your new location. If you have income stability and are sure you can repay what you owe in a timely manner, a personal loan could work for your financial situation. However, it is generally unwise to treat a personal loan as a solution if you are unemployed or have financial difficulties. Once you find a lender you like, you will submit a complete application with your loan details, your personal information and income verification documents.
Personal loan requirements vary by lender, but there are some considerations, such as credit score and income, that financial institutions always consider when reviewing applicants. One reason some people apply for personal loans is to consolidate debts, such as multiple credit card accounts. Personal loan denials vary, but the most common reasons are related to your credit score, credit history, and income. If you're buying new appliances, installing a new oven, or making another major purchase, taking out a personal loan may be cheaper than financing through the seller or invoicing a credit card. For couples who don't have that much cash, a personal loan may allow them to cover costs now and repay them later. Personal loan lenders may charge an enrollment or opening fee, but most do not charge any fees other than interest. The process for obtaining a personal loan begins with the verification of your credit score, which allows you to assess your creditworthiness and correct any errors. When you apply for a personal loan to pay credit cards or to organize the perfect wedding, you are borrowing money that needs to be repaid with interest. It may be easier to qualify for a secured personal loan and have a somewhat lower interest rate than an unsecured one. In some cases, personal loans can help you pay for unexpected life events or better manage finances when cash is tight. But before applying for one it's important to understand how they work and when they should be used.