Just before you delve into securing a personal loan, we have discussed some rules of thumb to guide your decision.
Personal loans come in many flavours. There are secured or unsecured loans. With a secured personal loan, you offer up collateral that’s valuable in case you do not payback. If you default, the lender gets that asset. Auto loans and mortgages and are typical examples of secured debt.
With an unsecured loan, the most common type of personal loan, you aren’t to put up collateral. If you don’t pay back the money the lender can’t garnish any of your assets. That’s not to say there aren’t repercussions. If you default on an unsecured personal loan it will hurt your credit score, which raises the cost of borrowing, in some cases dramatically. And the lender may file a lawsuit against you in order to collect your outstanding debt, with interest.
Unsecured personal loans usually finance a big purchase (such as a wedding or vacation), to pay down high-interest credit card debt or to consolidate student loans.
Personal loans are a lump sum which the lender will deposit into your bank account. In most cases, you’re to pay back the loan over a fixed period of time at a fixed interest rate. The payback period may be as short as one year to as long as a decade. However, this varies from one lender to another.
Your Credit Score Dictates the Cost to Borrow
Lenders want to be sure you can handle loans responsibly and will look at your past behaviour to get an idea of how responsible you’ll be in the future. Lots of late or missed payments are a big red flag. To keep our score high, always make all your payments on time.
Asides from of your credit score, lenders will look at your income, employment history, liquid assets and the total debt you have. They want to know that you can afford to pay the loan back. The higher your income along with assets and the lower other debt, the more trustworthy you appear to them. Having a good credit score when applying for a personal loan is important.