With rent costs, healthcare expenses, and collective debt increasing by the second, the average cost of living is shooting up. A lot of people turn towards personal loans to put food on the table, pay off their existing federal debts, and make ends meet, without risking bankruptcy. But, what is a personal loan? Is it safe?

By taking out a personal loan, you can ease off your immediate burdens and then comfortably pay them off in the agreed-upon time period.

However, understanding how they work, and the loan options that you have, can be difficult.

Continue reading to know what is a personal loan, and learn how you can leverage it to your financial advantage.

What is a Personal Loan?

A personal loan is a credit product that the consumer can get from banks, credit unions, and other types of lenders. They’re typically used for paying for personal expenses, including, but not limited to, student loans, medical expenses, auto financing, and personal events. A typical personal loan has to be repaid in installments over a period of 2 to 5 years.

According to LendingTree, as of 2019, about 19 million people in the US have personal loans.

The average annual percentage rate (the sum of all the associated fees and interest rate) for personal loans can vary, anywhere from 6% to 36%.

What is the Minimum Credit Score Requirement for Personal Loans?

The short answer: It depends on the lender.

While reviewing your personal loan application, the lenders will check your existing credit score.

Each lender sets their own limit.

That way, your credit score will help you narrow down your options when selecting a lender.

Loans that are difficult to get approved for i.e. those that require higher-than-average credit scores, have better benefits.

How to Apply for a Personal Loan

Applying for a personal loan, although, is more time-consuming than applying for a credit card, is actually quite easy.

Just follow these steps:

• Review your credit report and fix errors. If your credit score is low, look up ways on how to build credit fast.
• Strategically determine a loan amount. Ideally, it should cover all of the expenses that you need the loan for in the first place. You should also have additional funds left after the expenses are taken care of.
• Pre-qualify for a personal loan with lenders to get an idea of the rates, payments, and other things. Then, compare them to select the best option.
• Once you’ve selected a lender, fill out their loan application form. Be sure to carefully review all of the documents, especially the terms and conditions.

It can take as little as 24 hours to get the loan, after filling out and submitting your application.

The Different Types of Personal Loans

Personal loans aren’t classified based on the purpose they serve, but rather on the basis of your credit score and the time you need to repay them.

Here’s a breakdown of the most common types of personal loans:

1.     Unsecured Personal Loans

Unsecured personal loans are the common type of personal loan. As the name suggests, these loans aren’t backed by any collateral, such as a car, a deposit, or a house. This translates to:

• Higher risk for the lender
• Higher annual percentage rate
• A greater requirement for minimum credit score

Some leading providers of unsecured personal loans include Marcus by Goldman Sachs, Wells Fargo, and LightStream, among others.

2.     Secured Personal Loans

Secured personal loans, on the other hand, require the borrowers to declare assets as collateral. If you default on your loan, the borrower can seize and claim ownership of that asset, until matters are resolved.

All of this means:

• Higher risk for the borrower
• Lower annual percentage rates, as compared to unsecured loans
• Lower credit score requirement

TD Bank, PNC Bank, and BB&T Bank are a few of the many lenders that provide secured personal loans.

3.     Variable-Rate Loans

Another common way to classify personal loans is on the basis of how the interest rate fluctuates.

On that note, in a variable-rate loan, the interest rate fluctuates from time to time, which depends on a benchmark index that isn’t fixed.

A variable-rate loan should be taken if you intend on repaying your debt under a short period of time, as they have lower APR than their alternatives, fixed-rate loans.

4.     Fixed-Rate Loans

Fixed-rate loans, as the name suggest, are based on a fixed interest rate that doesn’t fluctuate over time.

Based on the borrower’s credit history, along with some other variables, the rate is determined in the beginning.

Unlike variable-rate loans, these loans have a higher APR, and are suitable for someone who plans on taking out a significant amount and paying off their debt with consistent payments.

Some other types of personal loans include:

• Debt consolidation loans
• Co-sign loans
• Personal line of credit
• Payday loans

Evaluate your options and select the one that best suits your needs and financial circumstances.

Conclusion

If you’re struggling with paying off your bills and other expenses, taking out a personal loan can help you ease some of the financial burden.

Talk to a financial advisor to see which option suits your needs.