Many people apply for personal loans. They use the money for various purposes like home renovations, celebrating major milestones, or going on a well-deserved break. Personal loans are also helpful in consolidating high-interest debts, which is why more people are applying for them instead of using credit cards.
But before you start applying for a personal loan, you need to understand what it is and what it can do for you. Here are some crucial facts about personal loans and how to maximize their advantage.
What are Personal Loans?
Applying for a personal loan means you will try to borrow a specified sum of money from lenders like a credit union or a bank. Unlike mortgages that you may use to purchase a home or an auto loan for vehicle financing, personal loans are for various reasons like paying for medical bills or tuition fees, buying large appliances or other household items, or debt consolidation.
Also, the repayment for a personal loan is different from paying your credit card bills, and you must pay instalments with fixed amounts over a specific time frame until the debt is fully reimbursed.
What are the Types of Personal Loan
You can send an application for a personal loan by choosing among these types.
- Secured personal loan – These loans are supported by collateral, including a closing disclosure (CD) or a savings account. If you fail to pay your obligations, the lender can claim any of your assets to serve as payment for your loan.
- Unsecured personal loan – It is the kind of loan that does not require collateral. Instead, the lender will require you to submit paperwork showing your financial history to check if you are qualified for the loan. However, this loan may come with a higher interest rate.
Where to Apply for a Personal Loan
Financial institutions like banks are usually the most preferred places to get a loan. But there are other types of institutions that offer these loans, including credit unions, peer-to-peer lenders, online lenders, and consumer finance companies. If you want to apply for a personal loan with a lower interest rate, try Homefield Credit Union or any other credit union that offers personal loans.
However, you need to ensure that your lender has a legitimate operation. Before submitting your application, you can check if the lender is registered with the Australian Securities and Investments Commission (ASIC).
How to Apply for a Personal Loan
Lenders and financial institutions will require loan applicants to undergo a process before approval. The procedures include submitting a credit report and meeting the required credit score. For example, if you have a higher credit score, the lender might grant you a loan with more favorable interest rates and better loan terms. But if you have a lower credit score, they might require you to repay the loan with a higher interest rate.
The financial institutions may also evaluate your debt-to-income ratio (DTI). It will allow them to check the total sum of your debt every month compared to the amount you earn. You can also check your DTI by yourself by getting the average of recurring monthly loans and dividing it by your total gross monthly income.
Getting a personal loan can be advantageous if you need help in various finances. But you must prepare all the necessary documents to get approval from financial institutions. Most importantly, it is essential to prepare yourself to repay all your loans to avoid getting low credit scores in the future.