20 Q&As About Personal Loans [2023 Ultimate Guide]

Q1: What Is A Personal Loan?

A personal loan is a specific amount of money that a lending institution (banks, credit unions, online financial platforms, or non-profit lenders) gives you for various purposes.

This makes it different from other loan types like Mortgage (house payment only) or Auto Loan (to purchase vehicles only), which are given for specific expenses.

A personal loan is commonly used to finance tuition or medical bills. Also, people take them to purchase new appliances, pay off debt, improve their homes, buy new household items, etc.

The personal loan repayment system differs from credit card debt and other loan types. Personal loans come with fixed-amount installments, which include the principal and interest rate, over an agreed period until the debt is completely cleared.

Here are some common loan terms you should know before applying for a personal loan:

• Principal: In the loan market, principal refers to the amount borrowed. It is the lump sum upon which the lender calculates the interest due for the loan taken. For example, when you take out a personal loan worth $2,000, that amount is called the principal. It decreases as you pay the installments.

• Interest: Interest is a percentage of the principal the lender takes as a charge for the loan. It is the main gain that the lender relies on when you take out a loan.

  For instance, if you take a $2000 loan and the lender says the interest rate is 5%, the amount charged is $100 and that is their gain. The interest on personal loans is paid monthly, along with the principal installments.

• APR: Annual Percentage Rate is the yearly interest charged by lenders on a loan. It represents the total fees, interest rate, and other costs inclusive, that lenders collect from a borrower for taking a loan.

  APR is usually fixed but it can also be flexible, depending on the lender. A fixed APR remains constant throughout the loan term, while the flexible or index-rate APR fluctuates during the repayment period.

  Most lenders charge APR based on your credit score. A good credit score of at least 700 usually attracts the lowest percentage while a bad credit would come with a high APR.

• Loan Term: The loan term refers to the period required to pay off the debt. This period is expressed in months and may range between 1 to 10 years. Upon approval, your loan application will come with a repayment term which you can accept or reject based on your capacity.

• Monthly Payment: The monthly payment refers to the percentage of the owed amount (principal+ interest) you must pay back every month to the lender. The installment payment is calculated to spread evenly across the loan term duration.

• Origination fees: The origination fee is the upfront cost charged for processing a loan application. It is expressed in percentage, and most lenders will require a 1-6% percent on top of the original loan amount.

  Lenders usually deduct the origination fee from the principal, meaning the fund receivable will be reduced. If your lender collects the origination fee, ensure that the amount after deduction is adequate for your expense.

Q2: How Do Personal Loans Work?

Generally speaking, these loans are issued as a lump sum and are to be paid over a fixed period at an agreed interest rate issued by the lender. The loan term of personal loans can range from 1 to 10 years, depending on the lender's offer.

Paying the debt earlier or later than the repayment period may attract prepayment or late payment fees. So, apart from the interest rates, there may be other fees, like those mentioned earlier, processing charges, and more.

Overall, personal loans are said to be one of the quickest funding options in the lending market today.

Q3: What Are The Types Of Personal Loans?

Unsecured personal loans

This is the type of personal loan without providing collateral to be given the funds.

Instead, the lender focuses more on your credit score, debt-to-income ratio, employment status, and others to calculate the risk of lending you the loan amount. You are still required to pay off using a payment plan and timeline, but no collateral is needed for qualification or repayment.

Secured personal loans

To qualify for a secured personal loan, you must tender collateral. Collateral includes personal assets like a car or home that have a value equivalent to the offered or requested loan amount. If you fall behind on your payments, the lender has the right to take possession of such collateral.

Fixed-rate loans

Getting a fixed-rate loan means that your interest and monthly payments remain constant throughout the entire loan term. That means the rate will not be affected by fluctuations in the market- it will neither increase nor decrease at any point.

The fixed-rate interest is suitable when you want a predictable monthly repayment amount. It helps you budget your income to cover other expenses while leaving an adequate amount to repay the debt.

Fixed-rate personal loans can be secured or unsecured but lenders may add some restrictions based on their discretion too. However, the most important thing about this type of loan is keeping up with the monthly payment to avoid penalties.

Variable-rate loans

Variable-rate or adjustable-rate loans simply mean that the interest rate and monthly payment are subject to fluctuations. It can increase or decrease based on the benchmark rate set by banks or the federal reserve.

The most suitable time to take a variable-rate loan is when you want a short-term loan. This is because initially, variable-rate loans have a low-interest rate which does not surge until much later.

So, if you pay up such debt before the rate increases, you'll be at a great advantage. On the flip side, the fluctuating rate in variable-rate loans makes budgeting tough as your monthly repayment is not easily predictable.

Q4: Where Can You Get A Personal Loan?

Online lenders

Call them FinTech or digital lending platforms, but they essentially exist to improve the personal loan borrowing process. These platforms allow you to compare rates and terms, apply for a personal loan online, and get a response on your qualification within days.

Online lenders are a great choice for seamless and convenient borrowing. Their fees may be lower and their flexibility is a bigger benefit. Also, you have plenty of choices to enable comparison and select the best offer.

The trade-off, however, is that they usually have high-interest rates when you have bad credit, and there is no access to a physical branch to contact a loan officer in person.

Tip: Online lenders and online brokers are distinct from each other.

Banks

The idea of going to banks for a personal loan may be fading, but these financial institutions process billions of personal loans each year. However, borrowers will need to have higher credit scores to qualify.

The good side of contacting banks for personal loans is that you stand a chance of receiving a cut-down APR, especially if you have an existing relationship with the bank. Also, traditional banks will favor borrowers who need a large sum of cash as a personal loan.

However, the drawback is that they require a strong credit score for approval and may have stricter requirements or specifications to qualify.

Credit unions

Another place you can get a personal loan is at credit unions. They offer different types of personal loans to suit your financial needs at better rates and terms because of their non-profit nature.

However, they require borrowers to be members of the union before they can gain access to loans. Fortunately, becoming a member of the credit union is not impossible as most of them have very easy requirements that can range from donating to charity to paying a small token like $5.

Credit Union personal loans are suitable if you have an average credit score and require a small quick loan amount. They generally have lower credit score requirements and are more favorable if you are in good standing with the lending institution.

Although credit unions give loans to people with bad credit, borrowers with a good credit score may have a higher approval rate. Some of them also check your income source to determine the most suitable amount to lend you.

Q5: How To Get A Low-Interest Rate Personal Loan With CreditYelp

CreditYelp is an online loan broker that helps borrowers get suitable personal loans for their financial needs. People with bad credit can access higher loan approvals and great offers with our guidance and direct connections to credible lenders.

We work with lenders that give personal loans for bad credit at a reasonable interest rate. CreditYelp not only connects you with credible lenders, but we also provide evaluations and comparison info on them so you can make an informed decision.

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Steps To Get Started With CreditYelp

Whether you're tech-savvy or prefer traditional lending, seamless processing and instant access are among the benefits of using CreditYelp. Here is how to get started:

Why Use CreditYelp Personal Loan Services?

• Because credit score is not the only determinant to approve loans, you can seal a deal even with a bad credit score.
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Q6: When Is A Personal Loan A Good Idea?

The best times or situations to take out a personal loan are:

1. When you need quick funding to make home improvements. Since most personal loan lenders don't make it mandatory to use collateral, you can conveniently repay the debt over time without losing your property.
2. You can opt for a personal loan when you have emergency expenses like medical bills, a broken down car, and others and you don't have a stash somewhere.
3. Personal loans can be handy when organizing events like funerals, weddings, and other personal unavoidable occasions.
4. You can also use a personal loan to consolidate a previous debt that has a higher interest rate. If the personal loan comes at a lower cost, you can easily take out one and use it to repay that existing debt. That way, you will reduce the overall cost of borrowing while avoiding penalties for late payments.

Q7: How To Qualify For A Personal Loan

Some applications for personal loans do not get approved by lenders because the borrowers do not meet the qualifications. To stand a higher chance of getting a personal loan, consider the following:

Credit score

The higher your credit history, the better your chances of getting an approved personal loan at a reasonable interest rate. However, this is not a huge determinant because personal loans also favor those with bad credit scores (depending on the lender).

Credit report

Lenders also look out for negative items from your past by going through your credit report. If you have reports like bankruptcy, delinquent payments, or foreclosure, your chances of getting qualified are slim. So you must correct the shortcomings in your credit report before applying for a personal loan.

Income

Your income level and credit history indicate your ability to repay the debt. Lenders will consider your gross income to see if you are fit for the loan amount. You can pair your main income source with alternate sources, like alimony, retirement income, foster care income, social security payments, and more, if the lender allows it.

Documents required as proof of income may include monthly bank statements, letters signed by employers, recent tax returns, and more.

Low Debt-to-income ratio

Your DTI is another qualification yardstick to consider when applying for a personal loan. The debt-to-income ratio is the relationship between your debt payments and your gross income. Simply put, it compares your debt to the amount you earn. It helps lenders determine the magnitude of risk associated with approving a loan.

Here's how to calculate it;

• Add up all your monthly bills, including rent, mortgage, alimony, tuition, auto, credit card, and other debts. (Note that general expenses like utilities, groceries, and tax are not included here.)
• Add up all your monthly income, including primary earnings, alimony, retirement, support, and others.
• Divide the total monthly bill amount by your gross monthly income (before tax deduction). The result is your DTI.

For instance, if your monthly debt is $2400 and your income is $6000, DTI will be 0.40 (40%).

Your debt repayment rate should be 35% or less to get a good standing. Anything higher than that needs some improvement to qualify for suitable offers.

Do I Need A Perfect Credit Score To Qualify?

Generally, lenders would likely consider borrowers with good or excellent credit scores over other applicants. According to NerdWallet's survey among lenders, you need between 560 and 660 credit scores to get approved for a personal loan.

However, a credit score isn't the only thing lenders consider when reviewing a loan application. So you may not necessarily need a perfect credit score to qualify for personal loans. Some lenders will consider factors like your relationship with them, debt-to-income ratio, collateral, employment status, education, and loan purpose.

In other words, you can qualify for a personal loan, even with bad credit, depending on your lender.

Q8: How To Compare Personal Loans

The number of personal loan lenders is increasing daily, meaning you can get many offers at once when applying for a loan. So, comparing rates from multiple lenders is crucial before deciding on one. Here are the things to look out for when comparing:

APR (Annual Percentage Rate)

The APR reflects the affordability of paying back that debt. It is calculated considering the interest rate plus any fees the lender charges. Generally, loans with a low APR indicate that the interest rate and other charges are reasonable. So, you should consider the offer with a lower APR when applying for a personal loan.

Loan term

Loan term, otherwise known as repayment terms, refers to the period you have to repay the debt. Since the period will affect how much you pay monthly, you need to consider the loan term especially based on how much you can afford.

It is important to note that shorter loan terms often come with lower interest rates, but they can be overwhelming if you cannot afford the installment amount.

However, some lenders who offer extended repayment terms do it to get more gain.

Regardless, it is not impossible to find a perfect loan with terms that have reasonable interest and repayment duration. So, don't hurry to accept an offer with uncomfortable conditions.

Fees

Some lenders include different fees in addition to the interest rate in their offers. The most common ones are origination, late repayment, and prepayment fees.

Origination fees cover the loan processing cost, late repayment fees are for defaulters, and the prepayment fees are charged when you repay your loan before the end of the loan term.

As stated earlier, not all lenders will include these fees but if you do find them in your offers, compare the costs to prevent extra burden.

Funding time

Some will take up to a week to send you the cash after approval, while others process the transaction within 24-48 hours after approval. If you need the money urgently, you need to consider lenders with quicker funding times.

Monthly Payment

Factors like the interest rate of the loan, the repayment term, and the actual loan amount usually determines your monthly payment. If you go for a personal loan with a shorter repayment term, the monthly payment will be higher, but the interest rate will be lower, and vice versa. So, choose the deal that offers the plan that suits you.

Discounts Available

Some lenders offer discounts on their loans for shorter repayment terms, early repayments, automatic repayment, established relationships, and more.

These discounts are handy as they reduce your interest rate by a small percentage. They generally help to reduce your overall cost of taking out a loan with such a lender. So, when comparing loans, check for discount offers and consider those with higher percentages for greater advantage.

Payment Flexibility

Do you want the option to change your due date? Will you consider pausing payments when things go south during the repayment period? What about skipping a payment portion until the following repayment date?

Some lenders will give you the flexibility of these options, and others won't. So pay attention to these before choosing a personal loan offer.

Q9: What Personal Loan Fees Do You Need To Keep An Eye On?

1. Origination Fee: This is a one-off administration and processing fee that the lender deducts from the total amount you want to borrow. The origination fee ranges from 1 to 10 percent of the loan amount.
2. Prepayment Penalty: Lenders gain revenue from the interest you pay upon your loan amount. But when you pay the loan entirely before the agreed end of the loan term, they charge you a prepayment penalty since they are now counting a loss.
3. Application Fee: The application fee is between 0.5 and 2.50 percent of your loan amount. It is the up-front fee charged for processing your loan application. The fee amount varies from lender to lender.
4. Late Fee: As it implies, the late fee is charged when the borrower fails to meet repayment at the agreed monthly payment date. The lender can also report the delinquency to Experian, TransUnion, and other credit reporting agencies when the due date for repayment is 30 days.
5. Payment Processing Fee: The payment processing fee varies from bank to bank. But it is a small amount charged for sanctioning your loan. Expect the processing fee to be between 0.5 and 2.50 percent of the total amount of the loan.

How to Avoid Personal Loan Fees

Despite the fees attached to personal loans, you can get the funds without paying too much for these processing or administrative charges. Here are some ways you can dodge these fees:

• Set Payment to be Automatic: Choosing an auto payment plan can help you avoid paying your dues late. That way, your lender will not collect fees for late payment because it was timely. Auto payment also puts your lenders at ease, knowing you are committed to paying back the loan.
• Don't borrow more than you need: The origination fee is charged as a percentage of the principal amount borrowed. That simply means the higher the loan amount, the higher the origination fee. So, borrowing a lesser amount will reduce the origination fee you have to pay.
• Compare the conditions of all offers: Not all lenders enforce all the personal loan fees. Another way to avoid these charges is to compare and consider lenders with reduced personal loan fees.
• Ask for a review of fee terms: Many borrowers have to pay several loan fees that would have been avoided if only they had negotiated the fees' terms with the lender in advance. So, don't just accept the terms; ask for a review instead. If you are a good customer, you may enjoy a fee waiver.

Q10: What Is the Average Interest Rate on a Personal Loan?

According to a study by Bankrate as of October 2022, the average interest rate on a personal loan is pegged at 11.07 percent for people with good credit scores. However, the rate could be higher or lower depending on factors like creditworthiness, lender's terms, and more.

See the table below for the average interest to expect on different credit scores:

On a broader note, the average APR on personal loans (total cost of loan) is 9.58%, according to the Federal Reserve's recent data, which is lower than credit card cash advances with 16.3%.

For instance, if you borrow $10000 and pay it back over two years, here's the APR charged if it's a personal loan vs. a credit card cash advance.

Q11: How Do Personal Loan Interest Rates Work?

Interest rates are what the lenders count on as revenue from the loan you are getting. For personal loans, the interest rate can be fixed or variable. Fixed interest rates remain the same over the loan term, while the variable rates fluctuate over time.

The interest rate charged on your personal loan amount will reflect on your monthly repayment throughout the loan term.

On a broader scale, instead of the interest rate, you may see the APR which is the combination of the total cost incurred over the life of the loan, including the interest rate, origination fees, and other expenses.

In other words, the APR of a personal loan clearly expresses the cost of the loan rather than just the interest rate alone.

Q12: What Factors Affect Personal Loan Interest Rates?

The interest rate of personal loans varies from lender to lender. Here are some factors that determine the interest rate of loans:

1. Market conditions: Lending institutions use the federal funds rate to determine their interest rate. So the performance of the market can affect the interest rate.
2. The lender: The lender also influences the amount they want borrowers to pay for getting loans from them. They may give you more favorable interest rates if you have a good relationship with them.
3. Credit score: Borrowers with higher credit scores can access personal loans with lower interest rates and vice versa.
4. Credit report information: The health of your credit history determines your access to interest rates, whether high or low. Credit reports with information like missed payments, delinquency, and bankruptcy may only be offered higher interest rates.
5. Loan amount: Since the interest rate is directly charged from a percentage of the total amount being borrowed, the loan amount will influence the interest rate. Hence, higher loan amounts; higher interest rates.
6. Repayment term: The longer the term of the repayment plan, the higher the interest rate. Loans repaid within a short term will be offered with lower interest rates.
7. Debt-to-income ratio: That is how much of your income already goes into debt monthly. So, if your DTI ratio is high, you may be charged a higher interest rate and vice versa.
8. Annual income: You stand a chance to be offered a more favorable APR if you have a steady and reliable income source to facilitate monthly repayment of the personal loan.
9. Collateral:When it comes to a secured personal loan, the collateral will influence the interest rate. Of course, it will be lower once you provide an asset to secure the loan.

Q13: How Personal Loans Affect Your Credit Scores

If well managed, a personal loan can help your credit in the long run. However, debt also has the potential to hurt your credit scores. Here are ways personal loans can affect your credit score positively or negatively.

Personal loans can affect your payment history, which by extension influence your overall credit score. When you repay personal loans on time, it improves your FICO score and vice versa.

The length of credit history is another way a personal loan can affect your credit score. When you open a credit account, the average age of your account is reduced which plummets your credit score. But in the long run, you can have a high average age of the account, which improves your credit health.

Q14: What Are The Pros and Cons of Personal Loans?

Personal loans come with perks and drawbacks. Before you take on one, you need to be aware of both sides of the spectrum to make the best financial decision. Let's start with the pros:

Pros

• It is easier to take a large loan and pay in smaller installments when there is a stable income.
• Lower interest rates compared to credit card purchases.
• Best way to consolidate multiple high-interest credit card debts into a single, lower-interest payment.
• Opportunity to build positive credit history upon on-time repayments.
• Multiple lending institutions available to compare rates.

Cons

• Negative impact on credit history in the event of late or missed payments.
• Personal loans can go into collections or be charged off when not paid at the due. This results in bankruptcy appearance on your credit report, lower credit scores, or even unhealthy credit lasting for more than 5 years.

Q15: What Are The Alternatives To Personal Loans?

Having gone through the rudiments of applying for personal loans, you may be considering other options. Here are some personal loan alternatives you can consider.

0% introductory credit card

0% introductory credit card has no interest for some time after it has been issued, usually between six and twelve months. During this period, you won't be charged interest on balance transfers, and the funds can be used to consolidate credit card debt or pay for new purchases over time.

Cash-out refinances

The cash-out refinance is a refinancing that allows you to convert your home equity into cash. Money from cash-out refinances can be used for nearly any purpose, but it primarily serves as a bigger mortgage to replace your existing home loan. Cash-out refinances rates are typically lower than personal loan rates.

A personal line of credit (PLOC)

A PLOC is similar to credit card loans because you can draw the amount you need from the available balance and pay interest on that amount only. The loan opportunity allows you to borrow a set amount for a given period.

Home equity line of credit (HELOC)

A HELOC allows you to draw loans multiple times, usually within 5-10 years. Its interest rate is usually flexible, and the repayment term is 10 to 20 years.

With a home equity line of credit, borrowers can get the funds they need with lower interest rates than personal loans. It is a good idea to take out a HELOC loan when you have a home improvement project or are preparing for a big expense.

Home equity loan

This is a secondary mortgage through which you can get a loan against your home's equity at a lower interest rate. The lenders loan you a lump sum which you are expected to pay back within a specified period and at the agreed interest rate. Such interest rates are usually stable and do not change throughout the loan term.

Reverse mortgages

Homeowners can opt for reverse mortgages instead of personal loans, especially if they want to take out a portion of their home's equity after completely paying off their mortgage. However, borrowers considering this loan option have to be homeowners and above the age of 62.

FAQs:

Is It Possible To Take Out More Than One Personal Loan?

Yes, you can apply for another personal loan if you have already taken out one. However, this is not applicable to every borrower because your previous lender may have policies that restrict you from taking out other loans.

While some will restrict you completely from applying for other loans, others may allow you but with different clauses. For instance, some lenders may insist that you take multiple loans with them only and not from external sources.

Should I Go For Personal Loans or Credit Cards?

It all depends on the purpose of the money you are borrowing. You should consider a credit card if you need to make smaller, everyday purchases. On the other hand, personal loans are ideal for large lump sums of money to finance personal projects or pay off high-interest credit card debt.

How Do I Manage a Personal Loan?

Managing a personal loan is not difficult because the loan terms and conditions are usually spelt out at the beginning of the deal. All you have to do is ensure that the repayment terms are suitable and make solid repayment preparations to avoid extra fees.

Also, in case of unforeseen financial setbacks, you can take out an extra loan with lower interest rate to pay off your existing loan(if your lender allows it)

What Are The Documents Required To Get A Personal Loan?

When applying for personal loans, lenders generally require government-issued IDs and a social security card to confirm your identity, bank statements to verify that you earn sufficient income, and tax returns to confirm your affordability level for the loan.

Do Personal Loans Have Penalty APRs?

For personal loans, there is no penalty APRs. In personal loans, the only fees for late or early payments are the late fee or prepayment fee. This is because penalty APRs are only effective on credit card debt.

When your repayment for a loan is 60 days past the due date, you get a higher interest rate attached to your credit card account. That higher interest rate is called a penalty APR.

Summary

Generally, a good credit score, verifiable income source and an acceptable credit history can help increase your chances of getting a personal loan at the best of terms.

Many online lenders offer personal loans, but to make the best decision, you need to focus on the ones with low APRs and interest rates, flexible loan amounts and repayment terms, and limited fees. This is where CreditYelp comes in.

With CreditYelp, you can easily get the loan amount, rate, and terms that suit your financial situation. Join CreditYelp today to enjoy great loan deals.