It is impossible to predict what the future holds. Even if you plan for emergencies, you may find you simply do not have the money you need to handle certain situations. You might have a sudden car expense or need to make updates to your home. Unexpected medical bills can quickly max out your credit card limits as well. Maybe you are going through a major life change such as a divorce and just want to get away from it all. Whatever your circumstances, knowing how to get a personal loan can help you get the money you need in a fast and stress-free way.
Types of Personal Loans
There are two main types of personal loans: secured and unsecured. You need collateral to get a secured personal loan. In most cases, that collateral is a car or house the lender can take if you default on the loan. Unsecured loans do not required collateral and are often approved based entirely on creditworthiness. In some cases, the item you are buying with the personal loan becomes the collateral, such as with a car loan or home mortgage loan. If you default on these loans, the lender can repossess your car or foreclose on your home. Unsecured loans typically have higher interest rates since there is no collateral. The following are the most common types of personal loans:
- Car Loans: These are secured loans that require you to have decent credit if you want a lower interest rate. Loan periods for car purchases can extend to five years or more.
- Mortgage Loans: You can get a mortgage loan to purchase or renovate your home. In some cases, it can be possible to get a second mortgage on your home to make improvements if you already have an existing mortgage. These loans can extend to 30 years.
- Home Equity Personal Loans: As long as you have enough equity built up in your home, you may be able to apply for a home equity loan and get a lower interest rate. Depending on the amount of equity in your home, you can often get a larger loan than with other loan methods.
- Cash Advance Personal Loans: Sometimes referred to as payday loans, these personal loans are easier to get than other loans. You just need several paycheck stubs as proof of employment and your ability to repay the loan. Most cash advance loans have to be repaid in a matter of weeks and have higher interest rates.
- Short-Term Personal Loans: This type of loan may be suitable if you need a small loan and can repay it quickly. Collateral is usually required for larger amounts, but online loan agencies may approve unsecured loans for up to $2,000. You should expect higher interest rates with short-term loans. These are also known as installment loans because you have to make a certain number of payments or installments during the term of the loan.
- Title Loans: If you need a short-term loan but have little collateral, you can use your car title as collateral. You have to turn the title over to the lender in exchange for the loan. These are secured loans that allow you to get a higher loan amount.
- Student Loans: You can get government student loans or private student loans to pay for your education. These are generally considered unsecured loans.
- Emergency Personal Loans: Some lenders offer emergency loans for customers in good standing who experience a sudden loss and need a loan for funeral or burial expenses. These loans typically require collateral of some sort, are short term in nature, and may have higher interest rates.
Choosing the Right Personal Loan
It can be quite challenging to find the right personal loan. Not only are there different types of loans to consider, but there are so many lenders from which to choose. Begin your selection process by first deciding what you will use the money for when approved. If you want to buy a car, a car loan is your best option. The same holds true for buying a house and getting an education — look for mortgage loans and student loans.
However, when it comes to other expenses, you still have several types of loans that you can apply for to get the money you need. To narrow down your choices, consider your current financial status. If you think you won’t be able to immediately repay the loan, look for a personal loan that has a longer pay-off term. You may not feel comfortable using your car or home as collateral, so search for unsecured personal loans. You want to choose a loan option with repayment requirements you can easily meet so your credit score will not be negatively impacted.
Applying for a Personal Loan
There are several ways to apply for a personal loan. You need to first find a reputable lender such as a bank, a community credit union, a loan agency, or another authorized lender. Many such lenders now allow borrowers to apply online for an immediate response. A loan officer may contact you to review your application or to request additional documentation that is needed to approve the loan. Lenders review the following criteria when approving personal loans:
- Proof of employment: You may need to provide several paycheck stubs to prove you have steady employment as verification of your ability to repay the loan. Lenders will look at your employment history. Borrowers who have been with same employer for years have a better chance of getting a personal loan than borrowers who go from job to job.
- Credit history: While your credit score itself is a good indicator of your loan-worthiness, lenders are more interested in your debt-to-credit ratio, account balances, and history of making payments on time.
- Financial history: Depending on the type of loan you are applying for, you may be required to provide copies of your bank statements. In addition to reviewing bank account balances, lenders are looking for bounced checks and non-sufficient funds (NSF) fees.
Becoming an educated consumer is the best way to get a great personal loan when you need one. You can quickly find a reputable lender that offers the best terms on a personal loan you can afford!
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