Have you ever acquired a loan? Most businesses seek funding from banks and financial institutions to pay substantial expenses. At times, they want to buy a new plant, and often, they have to fulfill their working capital requirements. Likewise, individual consumers also acquire loans to purchase a house or a car. But what about expenses that pop up out of nowhere?
Sometimes, people need money for fulfilling their expenditures instead of buying an asset. Perhaps, you might be getting married and need a loan. Likewise, you might need money for home renovations. There are all kinds of reasons people find themselves needing extra cash. Here, personal loans come in handy. They prove helpful for people from all walks of life, allowing them to afford necessities, projects, and dreams. In short, it helps borrowers bridge the gap.
As a borrower, you have to identify the amount you need to borrow and file an application to any financial institute. Modern lenders offer quick processes, making it effortless to acquire a personal loan. If you want to learn more about this, have a look below. Here is the ultimate guide for beginners to acquire personal loans in 2022.
How to Apply for a Personal Loan?
Truthfully, applying for a loan is a straightforward process. As per the banking procedure, you have to submit a few documents such as a salary slip, proof of employment, income, etc. However, opt for debt consolidation if you already have other loans pending repayment. You can combine the loans through this link; https://nectar.co.nz/debt-consolidation-loan/ and pay them together.
You have to fill out some forms stating your financial needs and purpose for a new loan. After this, the staff will conduct a thorough credit history check. It will then determine your repayment capability. From past credit records to bank statements, they will determine a credit score. Depending on the score you get, they will offer an interest rate.
Remember, the better your credit score, the lower will be the interest rate. Hence, check the number of active loans you have and make repayments timely to maintain a healthy credit score.
How Much Can You Borrow?
One of the first questions that hits the mind while acquiring a loan is ‘how much can I borrow?’ Unfortunately, there’s no accurate answer to this. The amount of money you can borrow mainly depends on several essential factors. First, the lender would see your repayment ability. Banks will check proof of your income and wealth to ensure you can clear off the loan without any delays. Second, they will determine the purpose of your loan; the reasons why you need money.
Lastly, they will assess the loan tenure; how long will it take for you to repay? Borrowers with a strong, reliable credit score and a stable income stream can borrow more money at low-interest rates. All in all, the amount you can borrow will depend on your overall financial situation and loan tenure.
Secured Vs. Unsecured Personal Loan
Personal loans further have two subcategories – secured and unsecured loans. Let’s distinguish between the two.
A secured loan is, as the term implies, backed by an asset that serves as collateral. Simply put, you have to put your car, house, or any other asset with the bank until you replay the loan. The lender can recoup losses if the borrower cannot repay the loan by selling the assets. As the loan is secured, the interest rate is comparatively much lower. After all, the lender risk is low.
In comparison, an unsecured loan isn’t backed by any asset. The borrower gets the loan solely based on the lender’s review of the borrower’s credit history. If the borrower defaults, the lender doesn’t have any assets to recoup losses. As a result, they charge a higher interest rate. However, people with good credit scores may still get a competitive rate, but higher than secured loans. An unsecured loan is ideal for borrowers with a recent history of bad credit or existing high debt.
Factors to Consider Before Opting for a Personal Loan
Undoubtedly, personal loans come in handy for personal financial needs, but it is not as straightforward as they may sound. At times, personal loans can land you in a lot of debt and associated troubles. Therefore, you have to be super careful before jumping on this bandwagon. Let’s go through five things you must consider before taking a personal loan.
- Interest Rates: Usually, the interest rates are high for personal loans, starting from 11.49% to as high as 25%. Therefore, you have to get the best possible rate. Furthermore, you have to understand the nature of the interest rate. Some banks offer a fixed rate, whereas others have a compounding rate which can significantly affect your monthly repayments. Discuss all these things with the agent before you call the shots.
- Repayment Period: Most banks have standard loan repayment periods for personal loans, i.e., five years. Although the period is determined based on your ability to repay and the loan amount, a personal loan won’t extend 60 months. Hence, make your calculations around this tenure. Also, try to repay the loan as quickly as possible so that you have to pay less interest.
- Active Loans: Have you taken any other loans? If so, it may affect your ability to repay the personal loan. Banks check on your outstanding debt, such as student or car loans. Accordingly, they approve the personal loan. Avoid taking a personal loan if you have an existing loan since it will increase your financial burden.
Final Thoughts
Even though personal loans aren’t a new concept, they have come into the limelight because of their feasibility. People going through a financial setback can get access to money through these loans in no time. Lenders ask for collateral or offer a slightly higher interest rate for loan approvals. All you need is a healthy credit history and proof of income to acquire a personal loan.