What is a Personal Loan And How Does it Work?
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A personal loan helps you to have immediate funds to finance lots of important purchases including a surprise engagement ring. It’s also a great option for home repair and DIY projects, and with a lower interest rate than you would have with a standard credit card.
And if you’re stuck with a bunch of high-interest credit card debt, you can take out a personal loan to consolidate the balances, thus removing the hassle of juggling too many monthly payments at once.
But like any kind of financial product, personal loans have trade-offs, including fees and interest rates. Personal loans can also impact your credit score and overall financial health.
Before signing on the dotted line, here’s what you need to know about personal loans and how they work.
What is a personal loan?
To start, all personal loans will not need or require the collateral and secure assets often asked from you, and minimal documentation is required on top of that.
Once you receive your funds from this type of loan, you’ll be able to use this money for every financial purpose that’s legitimate according to your needs. As with every other loan, this also needs to be repaid under the agreed financing terms with your lending source. These normally include a generous payback schedule over a few months to years that all have easy monthly payment instalments with adjusted interest.
How do personal loans work?
There are many types of personal loans offered, but they all fall into the category of secured and unsecured.
For secured loans, there is collateral required which are assets that you own that are used to secure the amount you intend to pay back. If you can’t pay back your loan, your lender then uses these assets as default and has the authority to claim them to pay off your loan.
As for unsecured loans, these are more common since they don’t use any kind of asset or collateral. This means that your lender can’t take away assets you own if you don’t pay the loan back.
Just so you know, there are penalties that can result from doing this if you default and directly hurt your borrowing ability and credit score. The costs of borrowing later will be increased dramatically making it nearly impossible to take on loans as a result of defaulting.
Is a personal loan bad for your credit score?
The answer is no. If you follow the rules and are careful to repay the loan on time, this can actually improve your overall credit score. Here are some very good reasons why:
The best part of a personal loan is that it’s not bad at all to improve your current credit score just as long as you’re completing monthly payments paid on time and under the agreed terms. With each of these payments paid in full every month on the schedule, you agree to pay back, it will improve and raise your total credit score.
You can damage credit scores by adding a personal loan on top of the debt you already have. This is all due to the amount you currently owe back to lenders and creditors.
Therefore, the higher the ratio of debt-to-income is essentially a mathematic equation that lenders are using to determine your monthly income. In a nutshell, they can see how much you earn, versus what is swallowed by debt can be a risk to your credit score.
How much can you borrow?
You’ll be glad to know that Quick Loans offer secured and unsecured loan solutions. Our secured loans can reach $20,000 and unsecured loans can allow as much as $2000.
You should also have a good rating on your current credit score whenever applying for a personal loan. Your future lenders will offer higher credit levels at better interest rates when you have outstanding credit rating scores. But higher credit scores by themselves don’t always guarantee immediate loan approvals as you’ll find out.
Duration of loan
The length of time that you want to borrow determines a couple of important points. The amount you want to borrow and the amount that’s repaid each month also depends on your source of income. It’s common with most lenders to provide prepayment options at fortnightly, weekly, or monthly periods. It also relies on when you’re paid as a regular income that will mirror your loan payments.
Thankfully, Quick Loans NZ offers a free interactive calculator tool to help you determine your repayment over time. You can decide how this best works for you based on your current income. The shortest time to repay any personal loan starts at 6 months and can extend up to a total of 3 years. All of us at Quick Loans want you to know that you won’t be punished or penalized if you decide to repay your loan sooner with higher payments than agreed upon in the loan contract.
If you want to talk to us about applying for a loan, please call us on 0800 200 275 or apply online.
This is not legal advice.
by Ash Horton
11/08/2021
Ash is a professional content writer with extensive experience in business development in the financial services. Ash has founded businesses from the age of 19, including franchising ventures, and working alongside some of the largest retailers in the world.