Your Quick Guide to Personal Loans

A personal loan is one of the most common types of loan issued by banks and other lenders, and is also one of the easiest to understand. The lender will issue a principal amount, which you must pay back over several installments with added interest. These installments are usually of equal amounts and scheduled on a monthly basis. As the name suggests, personal loans are personal, i.e. they are intended for personal use (not typically to start a business) and you are not usually required to divulge the reason behind applying for one. Most citizens with a fair credit score and a source of income will have access to personal loan products from multiple lenders.

If you are considering applying for a personal loan, here is a more detailed overview of what you can expect:

What Can I Use It For?

In theory, anything. A personal loan is a general purpose loan that you are free to use any way you desire. There are no conditions attached and the lender will not ask you outright what you need it for, unlike a business loan or a mortgage which is design specifically to buy a home. You may wish to make a material purchase, consolidate other debt, improve your home, cover unforeseen expenses, and so on.

How Much Can I Borrow?

Personal loans are intended for individuals who need to make a large purchase but do not have the finances upfront. The process of paying back the loan can therefore be envisaged as saving up for something in reverse. You already have the item or covered what you needed to, but now it’s time to pay for it. The average personal loan amount issued in 2015 according to TransUnion was just over £7,000. Some people however will wish to borrow below £1,000 and others might even push it to the tens of thousands. The exact amount you will be offered by lenders will depend on your income status, employment, credit score and various other factors. Typically however most lenders will not enter the $100,000 mark without requiring collateral. Particularly expensive items like luxury cars or real estate have their own unique loan products. You would not use a personal loan for these.

Do I Need Collateral?

No, personal loans are generally known as unsecured loans and do not require you to pledge any asset as backup in case you default. As long as you wish to borrow a realistic amount and do not have a particularly poor credit history, most lenders will approve you for such a loan after an assessment of your personal details and current finances. Only large loans or amounts they deem a risk will require collateral.

What about Interest?

Interest on personal loans is very easy to understand as it’s fixed across the full term and the monthly and overall amount you will need to pay will be presented clearly to you right at the start. Simply put, a personal loan of £8,000 with an Annual Percentage Rate of 10%, will cost you $800 in interest a year. Interest is determined by your creditworthiness (the better your score the better the rate), the length you wish to borrow for (the short the term the higher the rate), and various other internal lender policies.

Is My Credit Score Affected?

Yes, like most forms of credit taking out a personal loan will have an impact on your credit score. The act of applying will record a search informing other lenders that you have been seeking credit, and once you get the cash this will be added to your total amount of debt (which is only an issue if you already have a lot of debt). The good news is that if you make all of your payments your credit score is likely to improve, as this shows you are a reliable borrower.

What’s The Difference from a Credit Card?

Credit cards are a revolving line of credit that you can draw from time and time again, with no fixed payment term and sometimes a variable interest rate. Once you have paid off one of your instalments on a personal loan you cannot go back and draw from that amount again. When you have paid off all the instalments, you no longer have any access to the product. Credit cards are ideal for varied smaller day to day use, whereas a personal loan is more suited for focusing on one particular large purchase.

Can I Consolidate Debts?

As long as you are meeting the obligations of other debts, using a personal loan to consolidate them for easier management and to reduce interest is a great way to get back on top of your finances.

Loans for the Unemployed

There is nothing more stressful and challenging than a period of unemployment, and even though the majority of people will experience joblessness during their lifetime, there is still a stigma that is hard to get rid of. Fortunately lenders now recognize that losing your job is not always your fault, and you can still be a responsible lender worth issuing a loan to. These types of loan fall in to numerous categories, so here’s what you might by able to apply for depending on your individual circumstances.

Loans for a Secondary Source of Income

One of the key financial indicators a lender will look for when determining your eligibility for a loan is a stable source of income. However that does not necessarily just mean income from employment. There are numerous types of government benefits that you may be paid on a regular basis that can be used as an alternative to a typical wage. This might include disability payments you receive for being temporarily or permanently injured or disabled, supplemental security income, disabled widow and widower benefits, and other types of social security.

If you have unemployment insurance and lose your job through no fault of your own, you will receive regular payouts from this program. This can be used as income for certain lenders, as can payments from private pensions.

As long as you can show that you have a stable and regular source of income that is enough to cover the amount you wish to borrower, certain lenders will still loan to you if you’re technically unemployed.

Unemployed With Assets

You can also be issued a loan even if you have zero income at all. This is because a person’s overall financial standing is not just determined by what cash they receive, but the current cash they have. So if you have a large amount of savings and/or valuable assets, this may be enough for some lenders to deem your secure enough to lend to. This is because in theory you can dip in to this wealth to cover the loan, whether that means drawing directly from your savings or selling assets to raise the funds.

Seeking a secured loan where you specifically pledge something of value as collateral will improve your chances of getting a loan even further if you are unemployed. Common forms of collateral include land, real estate, vehicles, expensive jewellery, equity in life insurance and other polices, and virtually anything that is valuable and easily transferred or sold.

Home Equity

If you are unemployed but own your own home or have paid a substantial amount of the mortgage off, you can apply for what is known as a home equity loan. This is actually very similar to a credit card, however the credit limit is the equity within the home. It is also much the same as pledging the home as collateral, because if you fail to repay the loan a sale can be forced to cover the percentage owed.

Co-signers and Guarantors

If lenders are not approving your loans because of your own financial situation or unemployment, there’s a mechanism that essentially acquires somebody else’s credit-worthiness as your own. This person is known as a co-signer or guarantor, and if they sign up with you they will be agreeing to cover the obligation if you yourself fail to do so. This will commonly be a friend or family member.

Micro Lenders

Micro lenders are smaller lenders, often made up of individuals looking for ways to get a return on their savings. With the advent of the internet they have become much more popular, and pools of individuals are now rivalling larger lenders in what they can offer. The good news is that they are more likely to lend to low income and unemployed borrowers than the bank downtown. Some are even designed specifically for those in hardship.

Formally Informal Loans

If an informal loan is borrowing from friends and family, a formally informal loan (we made that up) is borrowing from friends or family through a legal contract. Anyone is allowed to draft a legal document and if signed with reasonable terms (i.e. those similar to a bank, with the principal, interest and other terms), can be enforced in a civil court. For larger amounts you may want to get a lawyer to give it the ok, but borrowing like this is a nice and secure way that bypasses traditional lenders and their policies.

Retraining Loans

Although not a loan for your own purposes necessarily, if you are unemployed and seeking to further your education and become more employable, you can seek out a “retraining loan” from the government which will fund your courses and training up to $5,500. This is a great opportunity for building your future prospects.

How To Improve Your Chances of Getting a Loan

Borrowing has become the crux of our modern society, so there’s nothing worse than being refused credit when you need it. Although there are many options out there (even for those with bad credit), if you don’t know what to look for it can be tough. Fortunately there are some tried and true ways to improve your chances of getting approved no matter what your situation or the loan product you desire. Here are just some of them:

Secured Loans or Co-Signers

If you yourself have been rejected you can improve your chances by offering the lender more security should things go wrong. There are typically two methods of doing this. Taking out a secured loan that requires collateral or signing the agreement with a co-signer. Collateral is when you use your home, vehicle or other valuable asset as backup should you fail to pay the loan back. A co-signer is a friend, family member or partner that agrees to share the burden. They are responsible for the outstanding debt if you fail to pay it. In some respects they become your collateral.

Choosing these types of loan will make it easier to be accepted and often for higher amounts, but they’re not always ideal. Here are some other tips to improve your chances.

Check Your Credit Report

Despite being the gateway to your credit history and a clear sign of your eligibility to borrow, it’s surprising how many people never bother to check their credit report. It’s not just important to view your overall score, but to double check that all of the information on the report is up to date and accurate. Occasionally a former lender may have left something negative that isn’t accurate or failed to record payments you have indeed made. Some accounts might not even be on there at all when they should be. This could be holding you back from being approved for a loan and you don’t even know it.

The higher your credit score the more access you will have to credit and you will be given better rates. The only sure way to improve your score is to successfully make payments. So if you are struggling, try opening a small manageable account (such as a basic cell phone contract) and in the months to follow your rating will slowly climb.

Research Your Eligibility First

Many people don’t realize that the very act of applying for a loan (even if you are rejected or you turn down the offer) is recorded on your credit report. If you have applied for lots of different types of credit in one go it can even lower your score, because it acts as a sign to lenders that you’re desperate for credit and other lenders aren’t approving you – so why should they?

To avoid this problem you should research the loans you wish to borrow before applying and ensure you meet their basic eligibility requirements. Fortunately lenders are becoming a lot more open with this information and many sites now exist that offer “soft searches” and pre-application information that can give you a good idea whether you will be approved before submitting a full application with the lender.

Are You Choosing The Right Loan?

Many different loans exist for many different purposes. It is important to apply for a loan that suits your needs the best, and failing to do so may be the reason for your application being rejected. In simple terms, could you be borrowing too much or requesting a loan term that is too long (or short?)

A payday loan for example is a small term commitment over just a couple of weeks. If you want to borrow a large sum of money you wouldn’t apply for this type of loan, you would need a longer term commitment with monthly installments.

Do you even need a loan to be paid directly to you, when an overdraft could meet your requirements and is easier to qualify for?

Have Your Documentation

The more evidence you have about your current financial situation, the better the chances you have of being approved for a loan. This can often be presented in the form of documents and statements from your bank account and employment. Many lenders now accept applications online and there will be options to attach digital copies of these to the application. It’s one thing earning X amount and having savings, it’s another to prove it. You could also provide details on your home and business assets, pension and insurance, and other household income.

Shop Around

It’s always tempting to dive right in with the large banks and lenders that everyone has heard of. Price comparison sites will tend to focus on these (because they get commission) and they’ll be the ones you see on TV and when you go downtown, however smaller banks and even online lenders exist that may be more lenient with your application. You might also find better rates as they try to attract more customers.