Personal loans, sometimes referred to as installment loans, are bank loans taken out by individuals who want to consolidate credit card debt, pay off medical bills, or purchase a boat for summer recreation. One of the reasons for the recent popularity of these loans is their flexibility. A lot of borrowers seek personal loans as a way to consolidate their debt. It is often easier for these people to keep track of one bill, sometimes with a lower interest rate than individual credit card debts.
When borrowers use a personal loan to consolidate debt, they gather necessary information from each organization to whom they owe money. The borrower presents this information to the lender along with personal financial statements, such as credit scores and proof of income. By pooling all of their debts into one loan, these borrowers may have a lower monthly payment and a lower interest rate. This method of debt consolidation has many benefits.
One of those benefits is the ability to recover from unexpected expenses, such as medical bills. Another important benefit is the chance to get back on track financially. Years of struggling financially have left a lot of people with several loans of various sizes; one personal loan may be enough to pay off each of those debts, leaving the individual with one single debt to worry about each month.
Unsecured Versus Secured Loans
Most personal loans are unsecured. This means that the lender didn’t have to offer collateral, an asset such as a house or car, as security. Unsecured loans generally come with a relatively high-interest rate which is included in the monthly payment amount. However, some personal loans are secured. In other words, if the loan isn’t repaid, the lender can take ownership of the home or car that was offered as collateral.
Is a Personal Loan Right for You?
When you’re feeling overwhelmed by the costs of unexpected medical bills or home repairs, it’s time to seriously consider a personal loan. Before jumping into a large new loan, however, there are several things to consider:
- Can you afford the monthly payment?
- Will you make the payments consistently (or risk losing your collateral?)
- Are you willing to pay the accruing interest and all related fees?
- Do you really need to take out the loan, or are you simply satisfying a want?
When you’re confident that you aren’t getting into additional debt on a whim, there are several steps you can take to put yourself in an appropriate financial position.
Steps to Improve Your Loan Eligibility
As you prepare to apply for a loan, begin with the understanding that not everyone who applies will get the loan they want. If you do qualify, you may only qualify for a relatively small amount, or you may qualify for more than you actually want to borrow. For future financial security, apply for the lowest amount you can and still cover your debts and expenses. Take these steps so you can qualify for a healthy loan with a low-interest rate:
- The best way to improve your credit score is to get out of debt and then don’t add any new debt. A high score, usually higher than 800, is considered exceptional by lenders. The higher your score, the better your interest rates will be.
- Your debt-to-income ratio compares the expenses you owe each month and the amount of money you make. You can get a good idea of this figure by adding up all the payments you make for debts and your housing expenses. Then, divide those monthly debt payments by your gross monthly income. It’s best to bring that ratio down to about 30 percent or lower.
- Obtain a stable, consistent source of income. If you’ve just started a new job, lenders are less likely to feel comfortable giving you a loan. The same is true if you don’t make the same amount of money each month. If you aren’t sure the bank will consider your income to be steady, consider waiting a few months before you apply or looking for a better employment situation.
Anything you can do to improve in these three areas will help you to qualify if you weren’t eligible initially. Before you fill out a loan application, strengthen each of these areas as much as possible.
Further Assistance From Banks
If your income is barely enough to cover all of your expenses, look through your budget for areas you can cut down on. if you have a low credit score, research ways to bring your score up. Leading financial experts, such as the bankers at Guyana Bank for Trade and Industry, an established bank with services for individuals and businesses, offer educational blogs and tools to help potential borrowers. Calculate your debt-to-income ratio to find other areas where you can reduce expenses.
A Personal Loan Should Improve Your Financial Health
Once you’ve obtained the loan, you’ll have a certain amount to pay each month. This installment (or monthly payment) must be made regularly for the specified number of years until the loan and all accruing interest has been paid to the lender. A personal loan is a great option when it is used appropriately. Carefully review your finances and maybe get a second opinion before applying for new debt.