Personal Loans: Definition, Types, And Factors To Consider Before Applying

Planning to get married but anxious that your savings could not cover up all the wedding expenses? You need not worry! You can openly apply for a personal loan to help you get financially assisted for your dream wedding. But before you decide to apply, you must first know what it is, what type you should get, and what factors you should consider before applying. 

In that way, you will know what ways and steps you should take to ensure that you will get approved of your loan amount. To enlighten you, here is a piece of simplified information about personal loans, including the key question that’s of the utmost importance to all buyers, which is how low can you offer on a house.

Personal Loan: The General Background

A Personal loan is one of the lines of credit or debt that allows you to borrow a specific amount of money to be repaid with interest over time. You can use this type of loan for wedding expenses, for unexpected medical bills, for debt consolidation, for paying off your child's tuition, for house improvement, etc. You can utilize or make use of a personal loan for any reason you have in mind, as long as it is purposive.

When you decide to apply for a personal loan, you will most likely encounter several financial terms that you need to know and understand to fully grasp the concept of a personal loan. These common financial terms include the principal, the interest, and the loan term.

The term "principal" refers to the exact amount of money you borrowed and received from your lender. The "interest" refers to the amount added to the principal that you also need to repay within the term of your loan. It is calculated by multiplying your principal amount with the interest rate times the time or the number of months within your "loan term."

You may apply for a personal loan to various financial institutions, such as banks, credit unions, and Non-Banking Financial Institutions (NBFIs). Non-Banking Financial Institutions (NBFIs) include insurance companies, peer-to-peer (P2P) lenders, and online finance companies. If you opt to apply for a loan online, you may visit the Personal Money Store, and they will help you find the best loaning company for you. 

Different Types Of Personal Loans

Most financial institutions offer an unsecured personal loan with a fixed interest rate. But there are other types that you must know for you to determine which type suits you best. The common types of a personal loan include:

Unsecured Personal Loan

Unsecured personal loans are the most common type of personal loan that you may consider having. It does not strictly require you to have collateral, but your loan application's approval is solely based on your credit file and report, evaluated by the lenders.

Secured Personal Loan

Unlike the unsecured personal loan, the secured personal loan requires you to have collateral as you apply. Collateral refers to a thing or a property, such as your vehicle or house, that can be forfeited from you if you fail or cannot repay your debt. 

Fixed-rate Personal Loan

A fixed-rate personal loan is a type of personal loan that allows you to have the same interest rate and payment each month. This personal loan type is good for people who are wary of changes and want to have the same budget each month.

Factors To Consider For A Personal Loan Application

Like any loan, you will only get the money you want to borrow if you inquire and apply for it. Of course, the approval of this application lies in the decisions of your lenders. But you can help them say "yes" to your application by securing these vital factors first before you apply:

Credit Score

Your lenders will check your creditworthiness by checking your credit score. Before giving you their approval, they will look into your credit files and reports to know your credit score. The higher your credit score or standing, the higher the chance you will get a yes from your lenders.

Income And Employment History

Your lenders will look into your employment history and income to determine whether you can repay the loan monthly. They will require you to submit proof of employment, and you must be able to provide one if you want to get approved. The more stable your employment and income is, the more likely you will get approved for the loan.

Your Debt-to-Income Ratio

Your debt-to-income ratio can be calculated by simply dividing the total of your monthly debt payments by your gross monthly income. The percentage refers to how much of your income goes to your repayment of debts.

Takeaway

Knowing all these personal loan facts will help you decide if this type of loan is the best one that suits or fits your financial needs. If you decide to apply for a personal loan and get approved, you must remember to repay this debt monthly and on time to maintain a good credit history and credit score.