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5 Things To Understand Before Taking Out A Personal Loan

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Debt is a serious matter. Debt has the power to both build and damage your financial future. The enormity of its power to influence our present and future lives warrants understanding how it works so that it can work to our advantage.

The personal loan, for example, can be used for just about anything, from travel to renovations on your home. The ubiquity of the personal loans is it can be obtained from just about anywhere, as financial institutions have made it easy to secure a personal loan online and through conventional methods. With this convenience, many consumers can find themselves overwhelmed by debt simply from not understanding basic lending principals.

Let’s take a closer look at what you should know and get your head around before you take out a personal loan.

Loan Types

Unsecured and secured loans comprise the majority of types of personal loans you might find today. Unsecured loans require no collateral, but to qualify, applicants must exhibit an ability to pay off the loan. The better your credit report, finances, and debt-to-income ratio the more likely you will get approved for the loan.

Secured personal loans will ask you to place something valuable down as insurance for the loan. Secured personal loans are great for people with no credit history or with poor credit history because they allow borrowers to establish, or in the case of poor credit re-establish their credit history. In many cases, borrowers can use their car, home, or other valuables as collateral.

Credit Score And History

Your credit score and history are the most important parts of applying for a loan, and for a few reasons. First, the FICA score that is derived from a number of factors determines your creditworthiness, or ability to pay off the debt. Your credit history tells the prospective lender your bill-paying habits, for example, whether you pay on time, whether you are a slow payer, or whether you allow your debts to go delinquent. Finally, the credit history and the score both determine your interest rate.

Interest Rate

The interest rate is determined by a few factors, one being the market and the second being your FICA score. Essentially, the interest is the percentage that banks will charge you for borrowing money, and the higher the interest, the more the consumer pays monthly to the financing institutions. When looking at interest, pay attention to how it is accrued (daily or monthly) and whether there are any conditions that change the interest rate. This is important because this amount always affects the payment amount.

Loan Terms

The loan terms determine the length of the loan and the types of penalties and fees that come with taking out the loan. Typically, loans can be as short as three years and as long as seven, and while your payment is lowered with a seven-year loan, you do pay more interest over time. Also, borrowers should pay attention to early payment penalties and any charges that might be tacked on to the principal in relation to opening up the account.

Sub-Prime Lending

Because getting a loan is quite simple, borrowers with less than stellar credit become vulnerable to lenders who not only charge usury rates but also include exorbitant fees to finance a loan. Furthermore, the terms of the loan dictate clauses that increase the interest rate significantly for late payments is also an indication that the loan is sub-prime. A good way to guard against this type of loan is to compare loan programs and interest rates.

Think Before You Leap  

Because taking out a personal loan can tie you to debt for years, research should always be a part of the loan application if you are a new borrower. By looking at the interest and terms available, you are better prepared to bargain a better deal. Alternatively, unfortunately, you might find yourself borrowing money with a high price tag.


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