Credit is available in various forms, like mortgages, credit cards, car loans, and personal loans. Each kind fulfills a particular need or helps you get close to achieving a goal, whether it’s purchasing a house, breaking a significant expense into more digestible payments, or funding a passion project.
A personal loan is a line of credit you can use to consolidate high-interest debts or make a large purchase. These kinds of loans usually have lower interest rates than credit cards, which means you can use them to consolidate numerous credit card debts into one, lower-cost monthly payment, helping you work towards becoming debt-free.
While credit is a convenient, powerful financial instrument, it also comes with a lot of responsibility. It can substantially affect your credit score, so it’s essential to use it with care. Here’s what you need to know about personal loans:
All About Personal Loans
A personal loan is an amount you borrow from a lending institution, like a credit union or a bank, for different purposes. While mortgages are used to finance a house and automobile loans are used to pay for a car purchase, you can use a personal loan for many things: paying for medical expenses, buying a new appliance, paying for education, or consolidating your debt.
Paying off a personal loan is different from paying your credit card debt. You’ll pay a fixed amount of installments over a specified period until you’ve entirely paid your debt, whereas the amount you’ll pay for your credit card debt depends on how much you’ve spent.
Personal Loan Terms
There are many loans you’ll encounter when applying for a personal loan, so it helps to be aware of them. They are the following:
APR – APR means “annual percentage rate,” which includes your interest rate and any lender fees charged to inform you of your loan’s actual cost. You’ll want to compare APRs to get a more accurate picture of the affordability of various personal loans.
Term – You’ll have to repay your loan over several months, referred to as the term. Once a lender approves your loan application, they’ll let you know of the interest rate and the duration of the loan.
Monthly payment – Each month during your personal loan’s term, you’ll have to pay a certain amount to the lender. The payment will include repaying the principal and a portion of the total interest owed over the loan’s life.
Principal – The principal is the amount you borrow. If you want to take a personal loan of $2,000, that will be your principal. The lender will calculate the interest they’ll charge you based on the principal you’ll have to repay. As you repay the loan, the principal amount decreases.
Interest – The interest is what the lender charges you for borrowing their money and repaying it over months. Each month, you’ll pay interest on top of repaying the principal you borrowed.
Unsecured loan – Personal loans are usually unsecured, which means you don’t need to put up collateral to get one. The car you buy with an auto loan or the property you’re purchasing with a mortgage serves as collateral to the lender.
Applying for a Personal Loan
When you seek any kind of credit, you’ll have to apply. However, before submitting one for a personal loan, you must look at your credit report and credit score to get an idea of what lenders will see when assessing your financial situation. Fortunately, checking your credit report does not impact your credit scores, making it crucial to check them as frequently as possible.
Once you’ve checked your credit and taken the steps needed to improve it, you can then apply for a personal loan through a bank, credit union, or online lender. Each lender you apply to will review your credit report and scores, which they’ll use as the basis of your interest rates and loan terms. They will also check your debt-to-income ratio or DTI, a number that measures the total amount of debt you have each month against your monthly income.
Personal loans are great for financing certain ventures that you can’t afford to pay in full. It’s also a great way to make your debts more manageable by paying each of them off in a single monthly payment. By understanding personal loans, you can take advantage of the many financial tools available to you.
If you’re looking for personal loans in Memphis, TN, let us know at Central Loan & Finance! We make same-day installment loans straightforward. Whether you are hoping to rebuild your credit, consolidate some bills, or get out of a bind, you can rely on our simple borrowing process to make things easier. Apply now!