Personal loans let you borrow a sum of money from a lender and then pay it back in monthly installments over a set term – usually anywhere from 12 to 84 months. Those monthly payments include equal portions of the original loan amount, plus interest and fees. For example, there may be an origination fee to process the application – sometimes charged upfront, sometimes added to the balance or deducted from the funds. Personal loans can be used for debt consolidation, home improvements, vacations, big purchases and more. Applicants generally need at least good credit for personal loan approval.
For added context, the average personal loan in 2018 was for about $6,400, with interest accruing at a 17.31% APR. Personal loans sometimes work better in theory than in practice, however. Roughly 3.21% of personal loan borrowers were seriously delinquent on payments, as of August 2018, according to data from TransUnion.
Plenty of people who take out a personal loan find a way to make the process work for them. Understanding how things will go, from the time you apply to when you submit your final payment, is the key to making personal loans work for you.
How Personal Loans Work:
Application. You will need to provide personal information (such as your address and SSN), financial information (such as your income and employment status) and more. The lender will evaluate and hopefully approve you.
Disbursement of funds. The issuer of the loan will deposit the money into your bank account as a lump sum. You can do whatever you wish with the money, unless the terms of the loan say otherwise.
Interest. From the day you take out the loan, the amount will begin accruing interest at a rate set by the issuer. So no matter how long it takes you to pay the loan back, you’ll always owe more than you originally took out.
Monthly payments. The lender will give you a required amount to pay each month. You can pay more if you’d like, but make sure that there’s no penalty for paying the loan off earlier than the terms of the contract stipulate. Some lenders may charge a fee.
Credit building. The lender will report to the credit bureaus whether you’ve paid on time each month. Once you’ve paid off the entire balance, including interest and fees, the lender will report your loan as paid in full. Abiding by the terms of your loan can help increase your credit score.
Personal loans are pretty simple. You just have to make sure to submit your payments every month, and setting up automatic monthly payments from a bank account can go a long way in that regard. The most complicated part of the process is probably selecting the correct loan, but WalletHub’s comparison tool makes that easy.
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