The best option to cover unexpected expenses is to have emergency funds or savings. However, sometimes even with our savings, we are not able to cover all our urgent bills. In those cases, we turn to personal loans. Personal loans range from $1000 to $100.000, while terms are set from 12 months to 7 years. The longer the term, the lower monthly payments and higher interest rates the borrowers pay.
How Personal Loans Work?
Compared with bank or credit union loans, the process of getting a personal loan from an online lender is much more effortless. You should visit specific websites suggesting loan services, adhere to their terms and conditions, privacy policy then start filling out an online application form. The completed form should be submitted for the lenders to review the data and check the borrower’s creditworthiness for making a loan offer. If the borrower accepts it, money is sent to the active bank account provided by the borrower.
How the Online Lenders Approve the Claim?
Online lender’s decision is based on three factors: credit scores, income, and repayment history. When reviewing the application, lenders usually check the requester’s credit scores; the lower the scores, the higher the risk of getting a denial is.
The lenders also calculate the debt-to-income ratio to see whether the borrower can cover the monthly debts or not. Thus, they compare the whole amount the borrower owes with the amount the borrower earns. Moreover, if the borrower has got more than one missed repayment, the claim may be denied.
How Are the Interest Rates Calculated?
Generally, personal loans have fixed interest rates. Thus, they are not changed, so the borrower makes the same monthly payment for the entire loan. Interest rates highly depend on the credit scores. With better scores, the loan will be provided with lower interest rates.
However, personal loans can also have variable interest rates, but this option is less prevalent. With floating rates, the final amount can be more or less depending on whether the rates are falling or rising.
Personal Loans VS Credit Cards
The primary difference between credit cards and personal loans is that the latter offers money to be paid back each month, while credit cards give a line of credit, a portion of which remains unpaid at the end of a billing cycle. This amount can either grow or decrease depending on the amount borrowed and the amount repaid.
Compared with credit cards, personal loans lessen the amount you spend on interest and provide a payoff date. Furthermore, there is no penalty for repaying the debt before the fixed day for personal loans, thus compensating earlier you save on interest.
Personal Loans Are Secured
A secured loan means that the lender requires a pledge or collateral. These personal loans are collateralized by valuable assets, including jewelry, real estate, cash accounts, or precious metals. If the borrower defaults on repaying the debt, the lender repossesses the collateral against the remaining debt.
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