Is a Personal Loan Right for You?

Life is full of ups and downs. Milestone events like weddings, bar and bat mitzvahs, and birthdays are exciting moments of growth and love. But then there are the curveballs that life throws, such as unexpected medical emergencies or major car or home repairs. While these events vary significantly in terms of emotion, they are similar in at least one way—each costs money.

With an event like a wedding or a major car repair, it’s normal to worry over the cost and constantly map out and analyze your budget. But what if no matter how much you try, the numbers just don’t work out? In this scenario, a personal loan may be exactly what you need.

What is a Personal Loan?

A personal loan is a loan that can help you with a variety of scenarios. It works in a similar fashion to many other types of loans, like mortgages or auto loans. You borrow money from a lender, which can be a financial institution or private borrower, to name a few. As part of your loan agreement, you agree to pay back your borrower, plus interest.

With any kind of loan, the interest is crucial to consider. Interest is the cost of borrowing money and is added onto the principal amount you’ve borrowed. It’s commonly shown as a percentage, known as the Annual Percentage Rate (APR). The APR will also include any additional fees that apply to what you owe, in addition to the principal amount and the interest.

Loans also come with terms, and a personal loan is no different. The term of the loan is the amount of time you have to pay back what you’ve borrowed, alongside any interest and additional fees. Terms vary greatly depending on the type and life of the loan—mortgages typically have terms up to 30 years, while a personal loan is more likely to have terms from a few months to a few years.

What Can I Use a Personal Loan For?

The beauty of a personal loan is the bounty of options it can be used for. Life is known for nothing if not the curveballs it can throw, and a personal loan can help you afford these important events.

Weddings, bar and bat mitzvahs, and honeymoons are all perfect opportunities to seek out a personal loan. A long-awaited dream vacation may also be an option. And while products like a home equity line of credit may also be an option, a personal loan may better suit your exact financial situation when it comes to something like a home repair.

Personal loans can also be used for some of life’s more unexpected challenges, like an unexpected medical expense or car repair. While an emergency fund is typically reserved for these kinds of expenses, a personal loan can allow you to pay for these events without tearing through your savings.

How Does a Personal Loan Work?

A personal loan works much in the same way as a mortgage or an auto loan. You’ll request an amount of money to be borrowed with your lender, and you and the lender will agree to terms. Remember, the terms include the rate at which your principal amount will collect interest, as well as the amount of time you have to pay back your loan.

Over the course of this term, you’ll make payments towards your balance. You’ll most likely make these payments each month. However, like other loans, such as your credit card balance, you’re more than welcome to make additional payments if you’d like to do so!

Who is Eligible for a Personal Loan?

When it comes to determining who is eligible for a personal loan, it’s truly up to the lender to decide who they will and will not lend to. However, there are a few key factors that will typically determine who can be approved for a personal loan. These loan eligibility factors include:

• Your Credit Score. Lenders want to know that you’re a responsible borrower, and your credit score is a great indicator to let them know that you can manage borrowed funds. Your payment history is the most important factor when it comes to your credit score.
• Your Current Levels of Debt. Most people will have some kind of a mix of debt, such as a mortgage, student loan debt, or credit card debt. In lots of instances, having a mix of debt is not an automatic denial for loans.
• Your Income. Borrowers want to know that you will have a steady source of income month after month to help make your payments.

If you're ever in doubt, consult your financial institution or lender about what criteria they look for when it comes to personal loan applications.

The Benefits of Personal Loans

On the surface, personal loans may sound a bit redundant. It may be tempting to simply use your credit card or explore another product depending on your intent, such as a home equity loans or lines of credit for a home repair. So why are personal loans a great option to consider?

For one, a personal loan provides you with the funds you’re seeking up front. You’ll have peace of mind knowing that your lender is providing you with the money you need for your dream vacation, family event, or other milestone all at one time. And outside of accrued interest, the charges won’t keep piling up with a personal loan like they potentially could with a credit card.

Personal loans also typically have lower interest rates than most U.S. credit cards. High interest rates and added fees have long been associated with credit cards, and these are two pesky elements that you’re likely avoiding when you go with a personal loan for your borrowing.