In a world brimming with unpredictability, one undeniable truth emerges: life’s journey remains uncertain. This reality extends its grasp to our financial domain. While we actively endeavor to cultivate financial proficiency, competence, and readiness – saving emergency reserves, sowing seeds for our future, and adhering to fiscal frameworks – the specter of the unforeseen forever lingers. The nature of existence can usher in unforeseen, even in the face of our most prudent preparations. Personal Loans offer a viable way to fund such needs that arise.
What Are Personal Loans?
Personal loans allow you to borrow a fixed amount of money for a variety of reasons, allowing you to experience financial flexibility. These loans are often unsecured, meaning they are not backed by property assets such as your car, home, etc. Because there is no collateral for the financial institution to seize in the event of missed payments, personal loans often carry higher interest rates than mortgages and auto loans.
Your specific personal loan interest rate depends heavily on your creditworthiness (e.g. your ability to repay the loan) and is based on your credit score, credit history, and your overall financial health. Individuals with a strong credit score and history can often enjoy lower interest rates, while individuals with a not-so-solid credit history may be offered higher rates.
Personal loan interest rates can either be fixed or variable, meaning that your rate will stay the same throughout the life of the loan, or is subject to change. Similar to home and auto loans, regular monthly payments comprised of both principal and interest are required until the loan is completely paid off.
Personal loan amounts can range from as low as $600 to as high as $100,000, though the average personal loan amount is about $11,000. There may be associated fees with personal loans such as origination, late payment, and prepayment fees; however, such fees will be outlined in your loan agreement.
Reasons for a Personal Loan
One of the biggest perks of a personal loan is that it can be used for a variety of reasons. Depending on your financial situation and goals, you can apply for personal loans to help cover any cash flow deficits you may be up against.
Consider using a personal loan for:
- Consolidating your debt. If you’re carrying a lot of high-interest debt, consolidating it with funds from a personal loan can help you simplify your finances and decrease your overall payments. After receiving the cash from your personal loan, you can pay off your outstanding debts, then you’ll begin your repayment process. You’ll want to consider the associated fees when calculating the benefits of debt consolidation.
- Funding a small business venture. If you’re an entrepreneur with a new business idea, you may need a personal loan to supplement your start-up costs or even expand your services in your early years.
- Home improvements. If you want to upgrade your home without borrowing against the equity you have in it, a personal home improvement loan is a great solution. Upgrading your home can increase its value, protect you from costly repairs in the future, and create a space you truly love. Lafayette Federal offers home improvement loans ranging from $5,000 to $75,000 with flexible repayment plans of up to 180 months.
- Paying for medical expenses. Whether you’re facing high-interest medical debt or want elective medical treatments or procedures, a personal loan can help you access the cash you need.
- Covering unexpected legal fees. Legal fees are often unexpected (and very costly). If you’re facing legal challenges, a personal loan can help supplement your emergency fund.
- Educational expenses. If you, your child, or your grandchild is wanting to pursue a higher education, it may be beneficial to weigh the pros and cons of using student loans and personal loans—they each have their benefits and drawbacks.
- Building and re-establishing your credit. With options such as our Credit Builder, Share Secured, and Share Certificates Loans, you can borrow money from your own savings account or certificate to get cash. You can earn dividends on your savings and receive interest while building your credit.
These are a few of the common reasons why you might consider a personal loan. Because of their flexibility and predictable repayment schedules, they offer a great funding solution for numerous possibilities!
Benefits of a Personal Loan
As we previously mentioned, flexibility is often the greatest benefit of personal loans. You can use them for a variety of reasons, and depending on your financial institution, you may not even be required to disclose what you’re going to use the money for.
The ability to receive funding quickly is another benefit that leads many people to pursue a personal loan. Applications can often be processed quickly, allowing funds to sometimes be available within days. This can also help provide you with peace of mind, knowing you can quickly access cash should the unexpected arise.
The flexible and predictable repayment schedules accompanying personal loans can also help you properly plan and budget your monthly expenses. You can work with your lender to determine your desired repayment term, resulting in a predetermined repayment schedule.
Personal Loans versus Credit Cards
Personal loans are often compared to credit cards because they can each help you advance your short-term financial goals and provide increased financial flexibility. But there are some key differences worth mentioning:
- Personal loans often have lower interest rates. Though extremely easy to use, credit cards can come with hefty interest rates. In 2023, the average interest rate on credit card accounts was 20.92% while the average interest rate on a 24-month personal loan was 11.48%. This significant difference has a major impact on your repayment plan.
- Revolving credit versus lump-sum. Credit cards offer revolving credit, meaning you can borrow more money as payments are made. Personal loans, on the other hand, offer you a one-time lump sum payment with clear repayment terms.
- Predictable versus unpredictable payments. Your monthly payment on your credit card will vary depending on how much you spent that billing cycle, your outstanding balance, and your interest rate. Your monthly payment on a personal loan will be fixed, often making it easier to budget for.
- Amount of borrowed money. As we mentioned before, consumers with strong creditworthiness can often get access to larger funding amounts through a personal loan, sometimes more than a credit card limit.
- Rewards and perks. Credit cards often come with cash-back offers, initial bonus offers, and other perks. This can make them a perfect solution for convenient, everyday spending. Personal loans do not offer similar benefits.
Major Factors Impacting Your Personal Loan Eligibility
The amount of debt you currently carry will have a major impact on how much lenders are willing to lend to you. Most lenders will check your debt-to-income ratio. This is calculated by dividing your monthly debt payments by your gross monthly income. Most lenders require your debt-to-income ratio to be less than 40%.
Your employment income can significantly lower your DTI, so having a strong income related to your debt is very important. Your credit score is also carefully evaluated because this can show lenders how you’ve handled your debts in the past.
Credit Union Solutions: Personal Loans for Members
The perks of banking with a credit union are numerous, especially when you need a loan. Credit unions are non-profit institutions and always seek to do what’s best for their members.
Unlike being a customer at a bank, credit union members receive customized, quick, and flexible service and enjoy access to competitive rates and unique financial products.
Obtaining a personal loan from your credit union could get you land you a highly competitive interest rate on the loan. Because credit unions aren’t beholden to their shareholders, they are able to pass the savings onto their members in the form of better interest rates.
They can also offer lower or no fees when it comes to initiating loans, flexible repayment plans, and often experience an easier approval process.
Obtaining a Personal Loan: Your Step-by-Step Guide
Next, we’ll walk you through our step-by-step guide so you can feel empowered and equipped to make a wise decision.
- Assess the loan amount you need.
- Compare lenders and loan requirements and terms.
- Gather your documentation and submit your application.
- Wait for the underwriting process and the lender’s decision.
- Carefully review the loan offer (then sign!).
- Budget the cash from the loan and create a repayment schedule.
1. Assess the loan amount you need.
With such a wide range of loan amount options available, it’s important to accurately assess how much you truly need. If you take out too little, you run the risk of needing to apply for another loan (which may be tricky). Alternatively, if you take out too much, you may find it difficult to repay.
Using a personal loan calculator is a great way to see the total cost of the loan, your monthly payment, the amortization schedule, and your payoff date. You can estimate your interest rate when performing your calculations (if this is an unknown variable).
2. Compare lenders, loan requirements, and terms.
This is a very important step because applying for a personal loan from a credible lender with favorable rates will help save you time and money. When shopping around for a personal loan, compare approval requirements, associated fees, loan amounts, repayment options, and the overall quality of customer service.
3. Gather your documentation and submit your application.
You’ll need to provide personal information such as your social security number, address, etc. You’ll also need to state your desired loan amount, how long you’d like the repayment to take, and what you’ll use the loan for (as noted above, some lenders don’t require you to have a specific reason).
You’ll also need to provide your current employment information, including recent paystubs and proof of any additional income you may have. The application will also ask about your assets and liabilities, and credit history. Some lenders may want further information such as recent tax returns and bank statements.
4. Wait for the underwriting process and the lender’s decision.
This process will depend on the lender and how many clients they are serving, but you can typically expect it to take 1-5 business days. The lender may also ask you for additional information during this period.
5. Carefully review the loan offer before signing.
Once you’ve been offered the loan, you should take your time looking over the loan agreement and all of the terms and conditions. Pay special attention to the interest rate, fees, and repayment terms.
6. Budget the cash from the loan and create a repayment schedule.
Once the cash has been deposited into your account, create a precise and clear budget for it. Resist the temptation to spend it on things you weren’t initially planning it for. Budget the repayments and set up automatic payments so you don’t have to worry about late fees.
Gain Financial Freedom with a Personal Loan from Lafayette Federal
At Lafayette Federal Credit Union, we know that sometimes you need a little help to achieve your goals. Contact us today and see how we can help you borrow the money you need to fund your vacation, make improvements to your home, or consolidate your high interest debt.