Whether it's to cover an unexpected medical bill or pay off high-interest debt, there are a number of reasons why you might consider taking out a personal loan. But how do personal loans work? Learn more below.
Secured vs. Unsecured
There are two kinds of personal loans: secured and unsecured. Most are unsecured, which means you won't need a home, car or other asset to borrow the money. That makes you a higher risk for the lender, though, because there's no property to take as repayment. So, you'll find that unsecured loans are typically more expensive. A secured loan, on the other hand, requires you to put up property as collateral, which means you have a lot more at stake if you're unable to make payments.
Sources and Repayment Periods
Banks, credit unions and online lenders are all common sources for personal loans. Typically, you borrow the money all at once with a fixed interest rate and then make preset payments for anywhere from 12 to 60 months. The amount you can borrow will vary by lender and is based on your income and credit score; the better your credit and the higher your income, the more you can probably borrow.
The Impact on Your Credit Score
To avoid hurting your credit score, wait to put in an application until you've settled on a lender. Each lender checks your credit before approving you, and multiple credit inquiries will cause your score to drop. In the long term, though, a personal loan can boost your score. If you use it to replace credit card debt, you diversify the type of debt you hold and demonstrate that you're not using all the credit available on your cards -- both of which impact your score.
Whatever your situation, it's important to know your options as you work to reach your financial goals.
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