The truth is, having access to a significant amount of money can sometimes make a huge impact on the lives of many individuals. For example, access to large amounts of cash can help you pay for major life expenses, pay off high-interest debt, and provide peace of mind when handling unexpected emergencies. Personal loans provide a reasonable solution for many people who need to handle many types of expenses, and there are many ways to use personal loan funds that are worth considering.
So, what is a personal loan? It’s important to consider the details involved before borrowing that type of money.
What Is a Personal Loan, and How Does It Work?
Technically, a personal loan is a form of installment credit that allows a lender (usually a bank or credit union) to provide a borrower with a lump sum of money. The borrower then pays that money back in equal installments over a specified period of time with interest added to the total amount.
Unlike lines of credit, such as credit cards, personal loans have a fixed repayment schedule and usually a fixed interest rate. Borrowers who take advantage of personal loans enjoy the option of receiving all the cash at one time. Additionally, the predictability of a personal loan repayment is easier to integrate into a monthly budget.
Secured vs. Unsecured Personal Loans
Consumers can apply for two main types of personal loans: secured and unsecured. Each type of personal loan comes with both benefits and drawbacks. Secured personal loans require borrowers to provide some form of collateral to secure the loan and guarantee its repayment. In other words, if you don’t make the required loan payments, the lender has the right to assume ownership of the collateral. Because of this extra layer of protection, lenders generally offer lower interest rates on secured loans, leading to better deals for people with poor credit scores.
Unsecured loans, on the other hand, do not require any collateral, which means that the lender relies on your timely repayment of the borrowed amount without having the right to seize any of your property for repayment. For these types of loans, lenders are more concerned about your credit history and general financial stability when assessing whether or not to give you the money you need to borrow.
How to Use a Personal Loan Calculator to Estimate Payments
Choosing the right personal loan for your needs should involve a careful assessment of the benefits of accessing the money you need versus the burden of repayment. Specifically, how much you will need to repay each month and for how long are important factors in deciding if taking out a personal loan is the right option. Using a personal loan calculator to evaluate options based on different principal amounts, terms, and interest rates is a good first step in weighing this decision.
Top Reasons People Utilize a Personal Loan
Although the definition of a personal loan leaves the door open to using this type of financial product for pretty much any type of expense, certain trends are more common among those who take out personal loans and are worth considering if you plan to do the same.
1. Consolidating High-Interest Debt
The fixed interest rates and predictable payment amounts associated with personal loans make this a reasonable option for consolidating debt to improve your financial situation. This is especially true if a lot of the debt is revolving debt, such as credit cards, where interest rates can be astronomical, and minimum payments and late fees add up quickly. Consolidating all your payments into one predictable amount is much easier to manage for budgeting purposes.
2. Covering Emergency Expenses
Life happens — and often comes with a price. Whether you need to pay an unexpected car expense, home repair, or medical bill, personal loans can provide you with the cash needed to settle debts and move on with your life in a way that is much more secure and easier to repay than a credit card.
3. Funding Home Improvements
Although it may not be an emergency, upgrading and improving your home is another common reason to take advantage of a personal loan. If your income is stable, it may be easier to take care of necessary projects and pay for them over time. The cash provided by a personal loan gives you the freedom to negotiate contracts and make payments to contractors as needed for upgrades.
4. Paying for a Major Life Event
Similarly to funding home improvements, using a personal loan to pay for major life events, such as weddings, family vacations, and necessary surgeries, may provide a better option than attempting to save the money in advance, especially when time is a factor. For example, many couples don’t want to wait three years to get married but are willing to secure personal loans to pay for their big day upfront and make payments throughout the following three years of marriage instead.
5. Financing Higher Education or Career Development
Finally, many people use personal loans to finance career development and education. You can use a personal loan in addition to federally subsidized educational loans or use them in place of those funds if you don’t qualify. Some people choose to do this because they need more money than subsidized loans will provide. Additionally, personal loans don’t have restrictions on their use, which allows students to use funds to help cover non-school-related living costs.
Choosing the Right Personal Loan with HRCCU
At Hudson River Community Credit Union, we work with our members every day to find the right financial solutions for every lifestyle. This includes offering a variety of personal loan products that can be used to cover common expenses. Contact HRCCU to learn more about these financial products and start your personal loan application today.
FAQs
How to get approved for a personal loan?
Getting approved for a personal loan involves filling out an application with your personal and financial information and providing the lender with key paperwork, such as proof of residency and income. Whether or not you will be approved for a personal loan depends on how the lender evaluates the information in the application.
If you are concerned that you may not qualify for a personal loan, consider meeting with a financial professional for a pre-qualification screening before you fill out your application. During this meeting, the financial professional will look at your situation to let you know if you will have any issues getting approved for a personal loan and help you understand what you can do to help increase the likelihood of approval.
Can you refinance a personal loan?
Yes. In most cases, if you qualify for an additional personal loan, you can use that new loan to pay off an existing personal loan along with other debt. This is a very common use for personal loans and is both a form of refinancing and debt consolidation.
What is an unsecured personal loan?
An unsecured personal loan is a loan without collateral. This means that the borrower provides nothing of value to help ensure the lender will not lose money in case of non-payment of the loan. As a result, unsecured personal loans have stricter eligibility requirements, and lenders will often need to see adequate proof of income and a solid credit history before issuing these loans.
What documents are needed for a personal loan?
To get a personal loan, you will need a variety of documents. First, you will need to verify your identity by providing a driver’s license or passport for proof of age and a utility bill for proof of residence. Next, you will need financial paperwork that proves your assets and/or income. Documents in this category may include recent paystubs, W-2 tax documents, and bank statements. Finally, you will need to fill out and submit paperwork for the loan itself (i.e., a loan application).
What can a personal loan be used for?
By definition, a personal loan is just that — personal — so borrowers can use the funds for pretty much anything. Common reasons people request personal loans include consolidating high-interest debt, covering emergency expenses, funding home improvements, paying for major life events like weddings, and financing higher education or career development.
