It's summertime, and the nice weather has us all dreaming big. Whether it's home remodeling, a new outdoor living space, a big vacation, or even just consolidated debt you dream of, a personal loan could be right for you. One of many types of loans you can borrow from a bank, personal loans can generally be used at your discretion to pay for exciting projects or unexpected expenses – similar to a line of credit. However, unlike credit cards, these loans can be difficult to secure and often have strict qualification requirements. Before you head to the bank, consider these seven fast facts to decide if a personal loan is right for you.
Personal Loan Facts
1. Personal loans are unsecured.
This doesn't mean that personal loans are unsafe – it means that you aren't required to use assets such as your house or car as collateral. This is one of the reasons why personal loans have a strict approval process. If you aren't able to make your required monthly payments, the bank can't seize your assets as payment for the loan. However, they can report late payments to the credit bureaus, hire a collection agency, and file a lawsuit against you.
2. Personal loans have a fixed amount.
Depending on the lender and your financial standings (your income, other pre-existing debt, and your credit rating), you could get approved for a personal loan for anywhere from $1,000 to $50,000. The better your financial standings, the more money you can borrow. However, unlike credit cards which you can continually pay off and charge more to, you can't re-borrow from personal loans. As you make payments, the loan balance will reduce, and in order to borrow additional funds, you will need to reapply for a separate personal loan.
3. Personal loans usually have fixed interest rates.
Fixed interest rates can be a benefit or a disadvantage. Fixed interest rates mean the interest rate on the loan will not change for the life of the loan – no matter what. The better your credit score at the time you take out the loan, the lower your interest rate will be. Economic trends also cause interest rates to rise and fall. If you have a good credit rating when you take out the loan, and interest rates are trending low, you will have the fortune of paying a lower cost for borrowing the loan. If your credit rating is low and interest rates are trending high, you may be stuck with a high-interest rate for the life of the loan, even if your credit score and the economy improve later on down the line.
While some personal loans do come with variable (changing) interest rates, payments on these loans can fluctuate as your rate changes, making it harder to budget for your loan payments.
4. Personal loans have a fixed repayment period.
Personal loans have a limited lifetime, and the term length of your loan will help determine your monthly repayments and your interest rate. Lengths are generally stated in terms of the number of months you have to pay back the loan, with longer repayment periods resulting in lower monthly payments. The longer the length of the loan though, the more interest you will end up paying over the life of the loan. Also, be sure to confirm if your lender charges a penalty for paying off the loan early.
5. Personal loans affect your credit score.
Generally, personal loans are reported by your lender to the credit bureaus. Your loan is then reflected in your credit profile and affects your credit rating. The loan balance isn't the only thing the credit bureaus take into account – inquiries on your credit report from applying for a loan and late payments can affect your overall score, so be sure to consistently make payments on time each month.
6. Beware of scams.
Sadly, scammers are out there, and they often target potential borrowers with a bad credit history. Lenders who guarantee approval regardless of your credit rating, or who require you to secure the loan by making a deposit, should be avoided. To be safe, stick with reputable banks, like North Country Savings Bank, and always do your research before submitting an application.
7. Stick with your bank.
Save yourself some hassle and apply for a personal loan through a bank you already have an account with. Not only are they familiar with you and your finances – they may even be able to recommend a different loan type better suited to your needs! They can also help you determine what a reasonable amount to borrow is and set you up with a manageable repayment plan.
Sometimes, we need to borrow a little in order to make the most of our future. Personal loans can be the perfect solution for funding big dreams or handling the unforeseen, but they are also a serious financial commitment. Before applying for a personal loan, visit your local North Country Savings Bank branch and find out if a personal loan is right for you!