Personal loans can be very helpful when it comes to borrowing money for expenses that need to be covered. A personal loan is money borrowed from a bank, credit union, or online lender that you pay back in fixed monthly payments, or installments, typically over the course of a few years. At Sun Loan, we offer personal installment loan options that you can use to cover any type of expenses.
How do personal loans work?
A common question we get is, “how does a personal loan work?” There are a couple of types of personal loan options–unsecured and secured. An unsecured personal loan, which is more common, is not backed by collateral such as a vehicle or even your home. An unsecured personal loan can be given by a lender based on things such as your credit score and credit history, among other factors.
A secured loan, on the other hand, is backed by collateral like your home or car, which the bank or lender can take from you if you fail to pay back the money you borrowed from the personal loan. Other types of personal loans include variable-rate loans–this means that your interest rates and payments may change by month; a fixed-rate loan, however, keeps your rate and monthly payments the same throughout the course of the personal loan.
Many people want to know if anyone can get a personal loan. Most people can, but not everyone will be approved–it all depends on income, credit history, and other factors. At Sun Loan we assess a person’s general ability to repay, including factors like source of income, proof of residency, ability to incorporate repayments into a monthly budget, and repayment history.
How personal loans affect your credit score
A personal loan will affect your credit score in a similar way as other types of credit. You can actually build your credit score when you make on-time payments on your personal loan. Late payments, on the other hand, can hurt your credit score if credit bureaus get reports on your late payment. When you apply for a loan, your credit score usually won’t change much, if at all. At worst, it may knock your score down by a few points. Taking out a personal installment loan with Sun Loan can actually help you build your credit. We report to all three major credit bureaus, which allows you to establish credit over time through consistent loan repayment.
What are personal loans used for?
A personal loan is just that…personal. You can use your loan for extra funds to help pay for whatever you need help with paying. Many people use personal loans to pay for car repairs, home improvements and repairs, emergencies and unexpected payments, medical bills and expenses, weddings and other celebrations, and even to combine their debt (known as debt consolidation) into one loan that can be repaid.
How to compare personal loans
When considering which personal loan is right for you, there are a few important things to compare between lenders, which we cover in more detail below. You’ll want to compare loan terms, interest rates, and additional fees so you can decide which loan–and lender–is the best value for your needs.
Loan terms
A loan term is the length of the loan, meaning how long you have to pay back the loan completely when you’re making consistent monthly payments. Loans are either short-term or long-term. Personal loans are typically short-term, with a window of up to three years (this can vary) to pay off completely. Car loans are another example of short-term loans, where borrowers typically have between three and six years to pay off the loan. Examples of long-term loans are mortgage loans and student loans. In most cases, the more quickly you can pay off the loan, the more money you’ll save on interest rates. Which brings us to…
Interest rates
The amount of money you borrow with your loan is called the principal. The interest rate is a percentage of the principal (loan amount borrowed). Say, for example, you borrow $6,000 with a 10% interest rate on a five-year personal loan. That means you owe $1,200 per year, which equals $100 per month. An interest rate of 10% on your $100 monthly payment equals $10 each month–that means you’ll need to pay $110 (plus any possible additional fees, which we’ll explain) each month to pay off your five-year loan on time.
The rate you’re quoted for your loan is the annual percentage rate (APR), which is the rate applied to your loan each year, including fees. Most personal loans, however, use a monthly periodic rate, which you can determine by dividing the APR by 12. Why do lenders charge interest rates? An interest rate is basically what it costs the bank itself to borrow money to give to you in the form of the loan, factoring in any risk of the loan not being paid.
What can you expect for a personal loan interest rate? That depends on a few things.
- Your credit score. The better your credit score, credit report, and creditworthiness, the lower your interest rate will be because there’s less risk of the bank not receiving full payment for the loan from you. If your credit score is low or you have a bad credit history, interest rates will be high on any loan you apply for, because the bank is at much higher risk of losing money.
- The term of the loan. As much as many people would like to pay off their loans quickly, that isn’t great business for a bank or lender. They make more money from longer-term loans, so they offer lower/better interest rates for longer-term loans like a personal loan for debt consolidation.
- The cost to borrow. To give loans, banks usually borrow money from each other at an interest rate based on the federal funds rate. If that rate increases (as it has been lately), interest rates increase. If the federal rates go down, so do interest rates.
Additional fees
As we said, many personal loans will come with additional fees, on top of the interest rate you receive. Not every lender charges these fees, so it’s best to shop around and do some research before taking out a personal loan. Here are some additional fees to watch for when applying for a personal loan:
- Origination fee. An origination fee is charged when you first take out your loan and is used to pay for costs to process and underwrite your loan. Origination fees are usually between 1% and 6% and may be rolled into your total loan amount and paid as part of your monthly payments.
- Application fee. Many personal loan lenders do not charge application fees–so if you notice an application fee when applying for a personal loan, you may want to negotiate not having to pay it or simply take your business elsewhere.
- Late fee. If you miss a scheduled payment or are late paying off the loan amount as a whole, you will likely be charged a late fee. This could be a flat fee of something in the area of $25 to $50, or it could be charged as a percentage of what you still owe on your loan–often between 3% and 5%. Remember: late or missed payments can negatively impact your credit score; if your late payments are reported to the credit bureaus, it can stay on your credit history for years.
- Exit fee. Also known as a prepayment penalty, an exit fee may be charged if you pay off your loan early. While this may seem like a punishment for a good customer paying off their loan to the bank ahead of time, the exit fee covers the interest that the bank/lender would have earned had you not paid off the loan early. Be sure to check on exit fees/prepayment penalties, because they can be costly.
If you want to avoid fees on your personal loan, compare terms from multiple lenders–some charge fees, some don’t. And you are always free to negotiate with lenders that charge fees. It may not work, but it’s worth a try!
Sun Loan makes personal loans easy
At Sun Loan, a personal installment loan can go a long way! If you need extra money, we can work with you to create a personal loan that keeps your monthly payments affordable, helps you build your credit, and is available the same day! Find out if our personal installment loans could be a good fit for your needs.
