We Answer Your Questions on How Do Personal Loans Work
Maybe you’re dreaming of updating your home with new flooring and modern appliances. Or, perhaps you’re dreaming of making good on that bucket list vacation destination.
Did you know you could make both of those dreams a reality with a personal loan?
Personal loans can be used for a variety of reasons—from making dreams come true to getting cash for an emergency. That’s probably why they are the fastest-growing loan product.
How do personal loans work?
This loan works much like any other loan—you borrow money from a personal loan lender that you pay back each month for a specific amount of time, usually two to five years. In the case of wanting or needing money for a big purchase or unexpected expense, a personal loan is a much better option than carrying credit card debt because loan interest rates are much lower.
There are two types of personal loans:
- Secured personal loans: These loans are aptly named because you “secure” them with collateral, like your home, car or a bank or credit union account. That means that if you default on a secured loan, you could lose that asset, as well.
- Unsecured personal loans: Most people take out unsecured personal loans. These loans are not backed by collateral but usually come with a higher interest rate.
What can I use a personal loan for?
According to experts, the best time to take out a personal loan is when you can make (or save) money in the long run.
- Consolidating debt: If you’ve carried a credit card balance, you know how quickly the interest adds up. If you pay the card off with a personal loan, you’ll save money on interest.
- Financing a business expansion: If you see a way to make higher profits at your business, a personal loan could help get you there.
- Home remodeling: If you don’t qualify for a Home Equity Loan or HELOC but believe you can increase your home’s value, take out a personal loan to get the job done.
- Go back to school: Do you need further training to get a new job or a promotion? You can use a personal loan for that!
- Immediate emergency expenses: If the car you rely on to get you to work breaks down, your furnace quits in the middle of winter or you have unpaid bills that will harm your credit, take out a personal loan to get you through the tough times.
Many people also take out a personal loan to have fun or pay for an unforgettable experience, like:
- A dream vacation
- A wedding
- A move to a new city
- A new car, boat or RV
While personal loans can be used for virtually any reason, there may be times when you would benefit from other financing options.
For example, if you have good credit, a balance transfer credit card with a 0% introductory interest rate may be the right option, provided you can pay off the balance before that rate increases. Or, you might qualify for a Home Equity Loan (HEL) to fund home improvement projects. HELs, or a Home Equity Line of Credit (HELOC), allow you to borrow more money at a lower interest rate than personal loans.
How does a personal loan affect my credit score?
Taking out a personal loan—in fact, even applying for a personal loan—will affect your credit score. Whether that effect is positive or negative depends upon the situation.
First, if you watch your credit score closely, you’ll notice your score go down when you apply for the loan. That’s because your application triggers what is called a “hard credit check,” which essentially means the lender is reviewing your credit history.
This action generally takes less than five points from your score. And, while it’s good to shop around for the best rates, remember that each application will trigger a hard credit check. Therefore, try to complete applications within the same week to minimize the time the credit checks stay on your report.
Once you’ve taken out the loan, it’s important to remember that about 35% of your credit score is based on your payment history. In other words, missing payments will seriously affect your credit score while making payments on time will increase the score.
Your score also may improve with a personal loan:
- Because you’ll diversify your credit mix. Different types of credit improve your score—like a mix of loans and credit cards.
- If you’re consolidating debt. Thirty percent of your credit score is based on your credit utilization ratio. This ratio measures how much you owe on accounts vs. your total available credit. Consolidating debt lowers this utilization and improves your credit score.
If you decide to take out a personal loan, keep in mind that you may be charged origination fees. And, you’ll likely be socked with additional fees if you pay your monthly installment late. But at Greater Alliance, we do not charge any origination or application fees!
How to get a personal loan
At Greater Alliance, we offer low personal loan rates, and the only fee we charge is a late fee. We also offer excellent customer service and faster approval than other, bigger financial institutions.
We have several loan options to fit your need:
- Fixed Personal Loans allow you to borrow up to $20,000 for 48 months at 7.24% APR. We even have an option for you to skip a payment if needed. Learn more.
- Fast Cash Loans get you money fast without needing a credit check.
- Shared Secure Loans allow you to borrow against your Greater Alliance savings account at a great low rate.
- Certificate Shared Loans are like a Shared Secure Loan, except that you borrow against your Certificate Deposit (CD).
When you are searching for a personal loan lender, consider Greater Alliance. We’ll help you dream big or give you peace of mind to pay a big expense. Use our loan calculator to see how much you can afford and then contact us or call 888-554-2328, ext. 290 or email us at gro.ecnaillaretaergnull@ofni.
Buying a car? Read our blog to see whether you should take out an auto loan or personal loan.