What is a personal loan used for?
Personal loans are a great way to secure extra cash when you need it. For instance, you might obtain a personal loan to finish a home improvement project or complete a landscaping endeavor. The reason for a personal loan can vary, and there are not many restrictions on what the money can be used for. Below is a non-exhaustive list of reasons individuals might seek personal loans:
- Moving costs
- Home remodeling
- Medical bills
- Funeral costs
- Appliance replacements
- Vehicle repairs
- Wedding expenses
- Vacation expenses
- Financing a new vehicle
- Installing a pool
- Landscaping costs
- Debt consolidation
Many people take out personal loans to pay off credit card bills in full because personal loans usually have a lower interest rate than most credit cards. If you can take out a loan to pay off your credit card, then you can pay that lump sum back at a lower rate, costing you less money in the long term.
How do personal loans work?
Understanding personal loans can feel confusing at first, but when it’s all broken down, they become very simple. First, you will work with a financial lender such as a credit union, bank, or even an online lender.
Most lenders will have a simple loan application process that will require you to submit the amount of money you need a loan for, as well as your credit score. With this information, the lender can then decide if they will approve your loan application.
If a lender agrees to loan you the money, they will also let you know what the interest rate will be and tell you the repayment schedule. From that point, you will be expected to make regular payments – usually monthly – to pay off the interest and principal of the loan.
What is the difference between principal and interest?
Principal: This is the amount your loan is for. If you are granted a $5,000 personal loan, that $5,000 is considered the principal loan amount.
Interest: Interest is essentially the “fee” a lender charges when they agree to lend money and it will most likely be a percentage amount. The higher your credit score, the lower your interest rate will be. Interest payments can add a lot to the final loan cost, so be sure to factor interest in when calculating what the loan will cost you.
How do I calculate my personal loan payments?
Our personal loan calculator makes calculating your loan extremely easy. You can simply input the amount of money you’d like to borrow, along with the estimated interest rate, and find out how much you will have to pay monthly, as well as the total cost over the lifetime of your loan.
To calculate monthly loan payments, you’ll need the following information:
P = Total principal amount or the loan amount
r = Interest rate per period
n = Number of payments over time
"Monthly Payment Amount"=P(r(1+r)n)1+rn-1
Can I get a personal loan with bad credit?
It’s possible to get a personal loan with a bad credit score, though it will likely end up costing more than someone who got the same loan with a good credit score. Since credit scores are the metric that lenders use to determine interest rates, a bad credit score will directly impact how much the loan costs over time.
The average annual percentage rate (interest rate on a yearly basis) for personal loans ranges from 10.3% to 32%, according to research conducted by Bankrate in 2022. See the breakdown below based on credit score:
|Credit Score||Average Interest Rates (Annual)|
|300 – 629||28.5% – 32.0%|
|630 – 689||17.8% – 19.9%|
|690 – 719||13.5% – 15.5%|
|720 – 850||10.3% – 12.5%|
What are personal loan terms?
The loan term, put simply, is the amount of time that you have to pay back the principal loan amount as well as incurred interest fees. Loan terms are a major factor in determining monthly payment amounts.
Many personal loans offer terms between two and five years, though it’s possible to find loans with longer terms as well. If you opt for longer-term loans, you’ll end up paying more money due to interest rates during your payback period.
How to find a personal loan near me?
If you’re interested in finding a personal loan in your area, talk to your bank or a local credit union. If those options are not feasible, you can work with an online lender to secure a loan.
Online lenders often offer very competitive loan rates and quick access to the loan amount, which are both positive factors when considering your lending options. However, be wary of predatory lenders that charge exorbitant rates.
Credit unions usually have very low interest rates available, but borrowers must first be members of the credit union to qualify. Banks tend to have some of the highest interest rates compared to other options, but they don’t usually require borrowers to have a bank account with them.