What is a Personal Loan and How It May Benefit You
A personal loan is a type of installment loan with a fixed repayment term and usually a fixed interest rate.
Types of Personal Loans
While the basic principle of a personal loan is the same – quick access to cash – the various types differ based on credit history, credit score, collateral and savings.
Unsecured Personal Loan
An unsecured personal loan does not require that you offer any collateral such as a home or car to receive the loan. The rate you receive on the loan is based on your credit history and credit score. The better the credit score, the better the rate.
Pledge Secured Loan
A pledge secured loan is one that uses your savings as collateral. You must have money in a deposit account to receive this type of loan. The amount of the loan is limited to the amount of money in your deposit account. You pledge a portion of your savings and receive that amount as liquid funds while the pledged portion is frozen until the loan is repaid. A pledge secured loan is a good fit for people trying to rebuild their credit.
Benefits of a Personal Loan
Personal loans have many benefits including paying for home improvements or a family vacation. For home owners who don’t have enough equity in their home for a home equity loan, a personal loan can cover the costs of an upgrade. While it’s not the best practice to take out a personal loan for a vacation, if used wisely, a personal loan is a better alternative than charging the vacation on a high interest credit card.
Another benefit of opening a personal loan is to consolidate debt because:
- You can combine multiple debts into one new debt
- The new debt typically has a lower interest rate
- You only have to make one convenient monthly payment
- Total debt can be paid off quicker
Common Pitfalls of a Personal Loan
Whenever you are borrowing money, it’s important to consider the possible downsides. Making the decision to to borrow money can hurt you financially in the long run if you don’t do your homework.
- Saying “yes” immediately – Just because you are offered a loan doesn’t mean you have to take it. Be sure to research multiple financial institutions for the best terms for your situation.
- Not considering credit requirements – When you apply for a loan, a credit check is a standard element of the approval process. Financial institutions perform a hard inquiry to check your credit history. With every hard inquiry, your credit score goes down by a few points and the inquiry can stay on the report for two years.
- Ignoring the fine print – With any binding contract, there is fine print. Details about interest payments and fees should not be overlooked.
- Having eyes that are bigger than your stomach – It’s tempting to take the most amount of money possible offered on a personal loan; however, if your financial situation changes in the future, you may not be able to afford the payments and interest. Have a reasonable number you want to borrow in mind before negotiations with a financial institution.
Learn more about personal loans by speaking with a Centris service representative at (402) 334-7000 option 0. We’ll help you evaluate your specific situation, discuss your options and determine the best product to meet your needs.
