Personal Loan: What You Need To Know Before You Apply

Getting a loan is a big financial step that requires proper planning. Loans can be a great way to take care of your financial needs, however, it can also get you into trouble if after taking the loan, you are unable to raise the money. There are a lot of people who have been helped by loans and there are many who ended up losing their valuable assets to loan. The most important thing to consider before getting a loan is the best type of loan that would be suitable for your needs. But before examining the types of loans we have, it is important to explain what loan is

What Is A Loan?

A loan is a specific amount of money borrowed from friends, bank, or other financial institutions. Every loan comes with a stipulated amount of money on the principal. This additional money is known as interest. Interest is the money charged on loan. It stands as the condition under which the loan would be given. Loans also come with terms and conditions and most times would require collateral.

Also, loans can either be secured or unsecured. A secured loan is one that involves collateral. Collateral is a substantial asset the borrower used to stand in for the loan. It is the asset or property of the borrower he or she signed to relinquish upon default. This implies that in a secured loan if the borrower should fail to pay the loan at the stipulated time, the financial institution or the lender can take ownership of the possession used as collateral. Collaterals can be cars, landed properties, or business. 

However, in an unsecured loan, there is no collateral. The major condition for getting this type of loan is the credit history of the borrower. Hence the lender does not have anything to lay claim to should the borrower default. An unsecured loan is less common and most preferred. 

Types Of Loan

There are different types of loans for different purposes. The type of loan you choose would be based on the purpose of the loan and your capacity. It would also be dependent on how you intend to pay back. Nevertheless, it is advisable that whenever you are going for a loan, do not borrow money that is above your ability. Borrow what you can avoid at the stipulated time. Below are explanations to  some types of loan you can choose from:

• Personal Loans

A personal loan is a loan borrowed to attend to personal needs such as getting a home video, furnishing a house, or even going on a vacation. A personal loan can be used for anything, there is no restriction on what the loans can be used for. Personal loans can be offered by banks, friends, online, and Main Street. It an unsecured and inexpensive type of loan. Hence, in the personal loan, the borrower does not need any collateral. No asset or properties would be forfeited upon default. The amount of money that can be gotten in a personal loan range from a few hundreds of dollar to thousands of dollar.

Although a personal loan does not involve collateral, the borrower would need some form of income verification and proof of assets that are up to the stipulated amount of money he or she wants to borrow. Also, the credit history of the borrower would be considered before the loan is granted. The application to fill for the loan is often not more than two pages. When the borrower applies for the loan, he or she would wait for a few days for the loan to be processed, after which it would either be granted or rejected. 

The Interest Rate On The Personal Loan

According to the Federal Reserve, the average interest rate on personal loans in any commercial banks for a period of one year is 10.21% in the fourth quarter of 2019. However, the interest can rise to three times this amount depending on the duration and the credit history of the borrower.

The interest rate on Avant's APRs range from 9.95% to 35.99%. 

It is important to note that the interest rate charged on loan can vary from person to person. This is because the most important factor used to determine the amount of interest that would be charged on the personal loan is the credit history of the borrower. Borrowers with reasonable credit history get the best interest charges while borrowers with questionable credit history get a bad interest charge. 

Notwithstanding personal loan is the best option for borrowers in need of a few hundred dollars to clear a personal need and are sure that they would repay within the stipulated period.

• Credit Card

Buying things with a credit card can be another form of personal loan especially when things are bought on credit and the debt is allowed to accumulate for a given period of time. Like the personal loan, credit card debt is charged with interest every month until the debt is paid.

In a report by the Federal Reserve, it was revealed that, as of the second quarter of 2019, the average interest rate on a credit card is 17.14%. However, this reduces to 16.88 in the fourth quarter. There is no collateral In credit card but when a customer fails to pay as at when due, penalty rate is charged. The penalty rate can rise up to 31.49% on just two of HSBC's Mastercard.

While a credit card can be used as a form of personal loan by using it to get all the things you need, the debt is charged strictly on the card. This is one of the major differences between personal loans and credit card. Aside from this, another major difference between the credit card and the personal loan is that the card can be used for revolving debt. In credit card, there is a stipulated amount of credit a borrower can get. However, the borrower can pay and borrow money repeatedly within the stipulated limit. It is this process of borrowing money repeatedly that is referred to as revolving debt.

Also borrowing with credit cards can be very convenient. In fact, studies have revealed that borrowers tend to spend more when using credit cards than when buying with cash. With credit cards, borrowers can get up to $10,000 credit limit. 

• Student Loans

Student loans are specifically for the purpose of financing the student's education. It is a loan borrowed strictly for educational purposes. Most times, this type of loan is borrowed to finance higher education such as a college degree. The two most common types of student loans include Perkins loans and Stafford loans. The interest rate on these two types of loans is reasonable and affordable. Also, you won't have to pay the loan while still a student. 

As beautiful as student loan is, when the loan stays up to 5 years, the interest can rise up to $100,000. This often leaves new graduates with a lot of money to pay upon completing their education. Student loans can be secured or unsecured.

• Bank Loan And Bank Guarantee Loan

Bank loans and bank guarantee loans are not the same things. These two terms referred to two different types of loans. In a bank guarantee loan, the bank issued a surety to a third party on behalf of one of its customers. If the customer could not meet up with the contractual obligations with the third party, the party can demand repayment from the bank. Most times, this type of loan is arranged for small business clients. For instance, a corporation may accept to borrow a contractor a stipulated amount of money on the condition that the contractor's bank would pay the money should the borrower default. In this case, the bank pays for the default. 

On the other hand, a bank loan does not always involve a third party. It is a loan between the bank and the individual borrowing the money. The bank loan also attracts a specific amount of interest and it is usually secured. 

• Small Business Loan

This is a type of loan that is strictly for business purposes. A small business loan is usually borrowed to start up a relatively small business or to expand an existing one. The best source of small business loans in the US is the Small Business Administration(SBA). The SBA offers a variety of options to the borrower, hence borrowers choose the best option for their business. Aside from the SBA, banks also offer small business loans.

Small business loans can be an effective option for starters who are looking for a way to establish their business. Before a borrower is granted a small business loan, he or she would submit the business proposal for review. During the period of review, the lender will determine whether the business is worth the loan or not. 

Small Business Loan is secured. This implies that the loan requires the use of collateral. Usually, the collaterals used in this loan is the personal assets of the borrower. 

In terms of interest, the interest rate on small business loans is negotiable and the loan can stay from 5 to 25 years. 

• Home-Equity Loan

Home-Equity Loan is a type of loan that is often borrowed by people who have a house. The house owners borrow against the equity they have on the house. As such, in Home-Equity Loan, the borrower can borrow up to the amount he or she has acquired on the house. For instance, if the borrower has cleared half of the mortgage payments on the house, he or she can borrow up to that half. If all the payment has been made, the borrower can borrow up to the full amount. If the house has increased in value by 50%, the borrower can borrow up to this increase in value. It then means that in a home equity loan, the mortgage payment and value of the house determines the amount that can be borrowed. 

The Interest Rate On Home Equity Loans.

Among the numerous advantages of the home equity loan, one that stands out is the low-interest rate. In a survey carried out by ValuePenguin.com, it was revealed that as of Feb 5, 2020, the average interest rate for a 15-year fixed-rate home equity loan is 5.82%. But, after the enactment of the 2017 Tax Cuts And Jobs Act, the interest on the rate is tax-deductible if the money is borrowed to “buy, build, or substantially improve the taxpayer’s home that secures the loan.”

The major disadvantage of Home-Equity Loan is that the house is often used as the collateral. Therefore if the borrower defaults, he or she loses the house. Also, the home value can go up or down, if the value should increase, the interest on loans can also increase. 

Home Equity Line of Credit (HELOCs)

Home Equity Line of Credit is another form of home equity loan that works the same way credit card works. However, in this type of loan, the house is still used as collateral. Like the credit card, the borrower is given a credit limit during which he or she can use, repay, and reused the credit. The typical duration for the Home Equity Line of Credit is 5-20 years. 

One important thing to note about the Home Equity Line of Credit is that the interest is not set at the time the loan is approved. Also, the interest is typically variable and may be tax-deductible. A variable interest can be good or bad. It is bad during the period of rising rate. This is because, in this period, the interest on the outstanding balance would increase and the borrower might find himself or herself stuck with paying off the debt due to the increase in interest rate. 

Of all these types of loans, the one that stands out is the personal loan. This is because the personal loan can be used for anything and the condition attached to getting the loan is relatively simple when compared to other types of loans. Among the numerous things the personal loan can be used for, below are five:

Five Things You Can Use A Personal Loan For

• Debt Consolidation

One of the major reasons to go for a personal loan is the debt consolidation benefit. Aside from the personal loan, there is no other type of loan that offers this opportunity. Debt consolidation can be the remedy for financial troubles especially when the borrower is faced with financial challenges. 

A personal loan allows a borrower to engage in debt consolidation by converting all outstanding payments into a single monthly payment. This single grouping makes the burden less overwhelming. Also, with a single grouping, it is very easy to work out how to pay the debt. Debt consolidation allows you to pay off credit card debt in finite terms.

• Personal Loan Can Be An Alternative To Payday Loan

When facing financial hardship, It is advisable to go for a personal loan than going for a payday loan. Payday loans can leave you worse than before because of its conditions and high interest. Although payday might help you with paying off the debt at once, the exorbitant interest on the loan can land you into another debt. In fact, some payday lenders charge an exorbitant interest of 400% over the loan. This is why a personal loan is better and safer when compared to the payday loan. 

• The Best Option For Remodeling Your House

If you are looking for a loan to remodel your house, personal loan offers the best opportunity. Whether you want to fix your kitchen, include a hot tub, add a swimming pool or landscaping or hardscaping, personal loan offers the best opportunity for this. 

Also, a personal loan is the best option for borrowers who don't have equity in their homes. 

• Unplanned Emergencies

Financial emergencies are inevitable. But in a situation whereby the emergency occurs at a time when you are faced with numerous financial expenses, a personal loan can be the rescue. Financial expenses like a funeral, accident, and other related issues can be taken care of using the personal loan.

• Vacation

You might have been dreaming of visiting some interesting place but have no money to finance your journey, the personal loan is the rescue you need.

• Buy A Car, Boat, Or Other Kinds Of Vehicles.

The personal loan can be the key to having the things you desire to have in life. 

Cars, boats, and other kinds of vehicles can be acquired using a personal loan. 

Summary

Understanding the different types of loans we have is a great way of knowing which one to choose. Among the different types of loans, the one that is safer and better is the personal loan. Personal loan does not require the use of collateral. It is unsecured and inexpensive. Also, the money acquired from a personal loan can be used for anything.