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Millions of Americans borrow personal loans every year to consolidate their debt, pay unexpected bills, improve their homes, and many other purposes.

According to TransUnion, the number of people who have personal loans has increased from 15 million to over 20 million in the past few years.

Why is a personal loan so appealing? Personal loans are available to consumers with good credit who have low-interest rates and smaller loan amounts. They aren’t the right solution for everyone.

Here are six things to know about personal loans if you’re considering getting one.

1. How do personal loans work?

A type of installment loan is a personal loan. This means that you borrow money and then pay it back monthly with interest over the term of the loan. This can usually range from 12 to 84 month. Your account is closed once you have paid off your entire loan. You can apply for a loan again if you require more money.

Lenders can vary in the amount of loans they offer, but most typically, these amounts range from $1500 to $100,000. Your credit score (i.e. How confident your creditors are that you will repay them if they loan you money.

It is important to consider why you require the money. Then, choose the loan type that best suits your financial situation.

2. There are many types of personal loans

There are two types: secured and unsecure personal loans.

Personal loans that are not secured are not backed by collateral. Your financial history will determine whether you are eligible. Some lenders offer secured loans if you are unable to qualify for an unsecured loan, or if the interest rate is too high.
Secured personal loans can be backed by collateral such as a CD or savings account. Your lender can claim your assets as payment if you are unable to pay your loan payments.

3. You can apply for a personal loan

When you think about where to get a loan, banks are likely the first place that comes to mind. Personal loans are available from other financial institutions as well.

Loans are also offered by Online Lenders and Peer-to-Peer Lenders to those who meet the requirements.

Quick tip In recent years, many internet lenders have appeared. You can check with the Better Business Bureau and Consumer Financial Protection Bureau to verify that a lender is legit.

4. Personal loans versus other options

Personal loans are a great way to get the cash you need in a variety situations. However, they might not be the best option. You may be eligible for a balance transfer creditcard with a 0% initial APR if you have excellent credit. A credit card might be a better choice if you are able to pay the balance off before the interest rate increases.

You should be aware that if you apply for a balance transfer card, and you fail to pay your balance or make late payments before the introductory rate ends, you could end up paying thousands or hundreds of dollars in interest.

A home equity loan, or line of credit might be an option for homeowners. These are sometimes known as HELs and HELOCs. These loans can provide financing for larger amounts and lower rates. HELs are usually installment loans. HELOCs, however, are a type of revolving credit. Be aware: These accounts can make your house the collateral. Your lender can foreclose your house as payment for the loan if you fail to pay.

5. Credit scores have an impact

The lender will pull your credit information when you apply for a loan. This is called a hard inquiry. It will typically lower your credit score by a few percentage points.

Hard inquiries generally stay on credit reports for approximately two years.

If you are shopping for the best rates, lenders you have an account with may review your credit. This is called a soft inquiry, and it doesn’t impact your credit scores.

You might consider checking rates with lenders who will perform soft pulls. This won’t affect your score.

6. Other fees and interest rates

Fees and interest rates can have a significant impact on how much you pay for a loan over its life. They also vary from one lender to the next. These are just a few things to keep in mind.

Interest rates Rates can range from 5% to 36% depending on your credit and the lender. The interest rate you will pay is generally lower the higher your credit score. The longer the loan term, the higher the interest rate you will pay.
Origination fees Lenders may charge a fee to process the loan. Origination charges usually range from 1% up to 6% of loan amount.
Late payment penalties: Lenders may charge a fee for early repayment. This is because the lender loses some of the interest they would have earned otherwise.
Consider adding up all costs to the loan and not just the interest rate before you sign the dotted line. This will help you determine how much money you’ll have to repay.

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