Personal Loan
About Personal Loan & How Does It Work
Credit cards aren’t the only option when it comes to financing purchases or consolidating debt. Personal loans are a popular choice thanks to digital offerings that make it easy to apply and get approved.
But before you sign on the dotted line, you have to make sure a personal loan is right for you. To do that, you have to understand the inner workings of this borrowing tool. You don’t want to end up with an expensive loan you didn’t understand or one you’re ill-equipped to pay back.
Rewind ten years when consumers had fewer options when it came to borrowing money. They could use a credit card, which usually meant paying high interest rates, or apply for a bank loan, which was hard to get without top-notch credit. The 2008 recession changed that.
With little in the way of consumer lending being done by the banks, a crop of financial technology startups (or FinTechs) emerged to offer consumers personal loans. Using different underwriting data and algorithms to predict risk, they created a market that’s now booming.
According to TransUnion, the credit scoring company, unsecured personal loans reached $138 billion in 2018, an all-time high, with much of the growth coming from loans originated by FinTech companies. The average loan size in the fourth quarter of 2018: $8,402. Fintech loans account for 38% of the overall activity in 2018; five years ago, it was just 5%.
- You can apply loan branches
- Refresing to get such a personal touch
- More than 20+ years of experience
- Monthly Income more than $5000
- No defaults in the last 24 months
How Personal Loans Work
Personal loans come in many flavors and can be secured or unsecured. With a secured personal loan, you have to offer up collateral or an asset that’s worth something in case you can’t pay the money you owe back. If you default, the lender gets that asset. Mortgages and auto loans are examples of secured debt.
With an unsecured loan, the most common type of personal loan, you aren’t required 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 can file a lawsuit against you to collect the outstanding debt, interest and fees.
Unsecured personal loans are typically used to 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 issued as a lump sum which is deposited into your bank account. In most cases, you’re required to pay back the loan over a fixed period of time at a fixed interest rate. The payback period can be as short as a year to as long as ten years and will vary from one lender to the next. For example, SoFi, an online lender, offers personal loans with terms between three and seven years. Rival Marcus by Goldman Sachs offers loans with terms from three to six years.
Borrowers who aren’t sure how much money they need can also take out a personal line of credit. This is an unsecured revolving line of credit with a predetermined credit limit. (In that respect, it’s a lot like a credit card.) The interest rate on a revolving line of credit is typically variable, meaning it changes with the prevailing interest rate in the market. You only pay back what you draw down from the loan plus interest. Lines are commonly used for home improvements, overdraft protection or for emergency situations.
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