General September 27, 2020 1

What Are Personal Loans?

A GOOD DEAL FOR PERSONAL LOAN? ARE THEY SERIOUS? - Internet Grandma | Make a Meme

Hello Friends, I hope everyone is doing well! Today, I will be covering another kind of debt – personal loans. As the name implies, this type of debt is taken out for personal reasons. You may or may not need to take one out; it all depends on your budget and financial situation. The more stable you are, the less likely you will need to take one out. I will try to give you as much information as possible. Sit back and enjoy the show!

What are Personal Loans?

Mr. Nahas, what are personal loans? Good question! Personal loans are a specific type of debt that can be used for a variety of reasons, usually pertaining to your personal life. This loan is unsecured, meaning there is no collateral. You don’t take these loans out if you want to finance a vehicle, a home, or your education; there are other loans that are available for those situations. There is some information that you should be aware of when considering this type of loan. They are:

  1. Loan Amount – this is the amount you take out and need to repay
  2. Interest Rate – the Federal Reserve sets interest rates and then your lender determines the interest rate they give you based on your credit score. The interest is simple, meaning there is no compounding effect
  3. Term – this is the time period that the creditor wants the debt to be paid back
  4. Fees – this includes any fees that the lender assess you for originating the loan
  5. Monthly Payment – this is the final monthly payment amount after interest and fees

What can I use a personal loan for?

Mr. Nahas, what can I use these for? Great question! This type of loan is versatile in it’s uses; you can use for just about anything, within reason though. Here are some of the things that you can use them for:

  1. Unexpected Expenses
  2. Weddings
  3. Funerals
  4. Debt Consolidation
  5. Honeymoons
  6. Vacations
  7. Home Renovations
  8. Gifts

I think you get the point that I’m trying to make. You can use these loans for a variety of reasons; however, it’s important to note that the lender may have some restrictions on how you are able to use the funds, but you should check with them first.

How do I get a Personal Loan?

Mr. Nahas, how do I get a personal loan? Fantastic question! It’s relatively simply for you to get a personal loan because these applications usually tend to be quicker than other types of loans. Here are some of the ways you can apply for a personal loan:

  1. Visit your bank or credit union in-person or go to their website and apply for a personal loan
  2. Visit a loan search engine like Lending Tree and enter your details

Although the application process is simple, the lender will still need to verify some things like:

  1. Credit Score – this is the magic score that determines if you are a worthy borrower. If you have a high credit score, you can expect to have a lower interest rate. Since this is an unsecured loan, the lender might be a little stricter with the credit score.
  2. Income and Debt – the lender will need to verify that you have sufficient income to pay the monthly amount. They will also take a look at your debt and calculate your debt-to-income ratio (monthly income to your debt). They want to make sure that you don’t have too much debt compared to your income. At the end of the day, they want to make sure that they are lending the money to someone who will pay it back to them
  3. Financial History and Credit Report – the lender is going to dive into your history to make sure that you have a track record of paying off debt. They want to make sure that you don’t fall behind on payments often or have any chance of defaulting on the loan. They will also look to see how many accounts you have opened and closed in the past.

Should you get a personal loan?

This is probably a question you are wondering, and the answer is…maybe. It all depends on your financial situation because the last thing you want to do is apply for a loan that you don’t need. Debt tends to have a snowball effect on people, and the snowball keeps getting bigger and bigger as time passes, so it’s best to stay away from this time of debt. There are some situations where it might be useful or necessary to get a personal loan. Some examples are:

  1. Unexpected Expense – unfortunately, you don’t know what life is going to throw at you. Ideally, you would have financial safety in order to pay for the unexpected expense, but life doesn’t always play fair. You may have had a previous unexpected expense that you paid for and you experience another unexpected expense, but this time you don’t have your financial safety net. The last thing you want to do is use your credit card or a personal loan. If you are unable to come up with the money from overtime at work, family members, or side hustles, then it might be best to take out a small personal loan to get you through the situation. Once you get through it, you should aggressively pay off the debt
  2. Consolidating your Debt – Ideally, you wouldn’t have any debt to consolidate but life happens. You may have credit card debt that keeps growing because the interest is so high on it. In a perfect world, you wouldn’t carry a balance on your credit card, and you would make sure to avoid carrying any sort of balance. Again, life happens, and you need to use a credit card for some reason but now you are stuck with a high credit card balance paying 24% interest. This may be the time to take out a personal loan and pay off the credit card debt with it; this would help you pay off the debt faster because personal loan interest rates are usually lower than credit card interest rates

There are very few reasons to take out a personal loan. In my opinion, you should not take out a loan for vacations, honeymoons, gifts, etc. You should save up or use your side hustle money to pay for these expenses. The last thing you want to do is get more debt; bad debt destroys wealth, so you have to be careful.

I hope that I provided you all with a good amount of information on these types of loans. Personal loans are not to be used for irresponsible purchases or expenses and should only be used in dire money situations. Ideally, your side hustles, investments, or financial safety net would pay for the expenses. If you have any questions or need me to clarify anything, post a comment and I will reach out to you as soon as I can. Thank you, friends, for stopping by! Take care and see you soon!

Peace Out,

Mr. Nahas

P.S. Don’t forget to like, comment, subscribe to my email list, and to share this so I am able to help as many people as possible!

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Mr. NahasFinance:

1 Comment

  1. ceridwensilverhart

    September 30, 2020
    Reply

    Great information! I try my best to avoid needing a loan, but you never know what life may bring, so I should know the basics just in case.

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