Personal loans can help you finance most major purchases, from an engagement ring to home repairs, often at a lower interest rate than paying with a credit card.
And if you’re stuck with a bunch of high-interest credit card debt, you can take out a personal loan to consolidate the balances and lower the overall APRs, thus removing the hassle of juggling too many monthly payments at once.
But like any kind of financial product, personal loans have trade-offs, including fees and interest rates. Consumers should think carefully before applying for loans, since they can impact your credit score and overall financial health.
Here’s what you need to know about personal loans and how they work.
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What is a personal loan?
Personal loans are a form of installment credit. Unlike a credit card, a personal loan delivers a one-time payment of cash to borrowers. Then, borrowers pay back that amount plus interest in regular, monthly installments over the lifetime of the loan, known as its term.
Due to the rise in peer-to-peer and online lenders, there are hundreds of fast, easy loan options out there, and most take less than 10 minutes to apply for on the web. The full approval process, however, can take up to one business week, depending on how fast the lender receives and processes your documents (more on that below).
At the very least, personal loans charge interest. You might also run into other fees, such as an origination or administrative fee that gets taken out of your loan amount once you’re approved, or an early payoff penalty for paying the loan off before the end of your term (making the lender miss out on future interest payments). The average 24-month personal loan APR is 11.23%, according to the Fed’s most recent data. For comparison, the latest average APR for credit cards is 19.07%.
How do personal loans work?
Once you’re approved for a personal loan, the cash is usually delivered directly to your checking account. If you’re getting a loan to refinance existing debt, you can sometimes request that your lender pay your bills directly.
For instance, when you’re approved for a Happy Money loan, you can have your funds sent via direct payment directly to creditors, which helps ensure that you don’t spend the cash on other things.
However you get your funds, prepare to start repayment within 30 days. If you have a fixed-rate loan, your monthly installments will stay the same amount until the loan is paid off. If you have a variable-rate loan, your interest rate will fluctuate and could change the amount you owe month to month.
When your personal loan is paid off, the credit line is closed. You will no longer have access to it.
How to apply for a personal loan
Do some research before you apply for a personal loan. Read reviews and learn what to consider before taking out a loan. Familiarize yourself with CNBC Select’s list of best personal loans (also listed below), and when you’re ready to apply, follow these steps.
- Shop around for the best rate. Be sure to avoid hard inquiries by checking what you qualify before submitting a formal application. Submit your information to the lenders that interest you, or use a lender marketplace service (such as LendingTree) to shop for the best deal.
- Decide on the best offer and submit a formal application. You’ll need to have your social security number on hand, as well as supporting documents such as bank statements and paystubs.
- Wait for final approval. This could take less than an hour or up to a full business week. It depends on when you applied (during normal business hours or not) and how quickly you submit the required documents.
- Get your funds. Once your loan is approved, you’ll need to input your bank account information so the funds are deposited into your account. With both LightStream Personal Loans andDiscover Personal Loans this process can be completed within the same day your application is approved (though this is subject to change based on when your electronic banking information is verified, the bank you use, etc.).
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