The Complete Guide To Personal Loans

Are you wondering what a personal loan is and how they work? This type of financing can help you pay for a range of expenses, whether planned or unplanned. But is a personal loan the best option for you? In this comprehensive guide, we’ll provide all the information you need to make an informed decision about whether or not to apply for a personal loan.

If you still have questions, our knowledgeable employees are here to help! Call (877) 818-DNCU or contact one of our Northern New Mexico branch locations in Española, Los Alamos, White Rock and Santa Fe.

What are personal loans?

Here’s an overview of everything you need to know about personal loans and how they work:

• All-purpose: Personal loans can be used to finance just about anything you need cash for.
• Access to funds: If your personal loan application is approved, you will receive the full principal (the amount borrowed) in a lump sum after your loan application is approved.
• Term loan: Personal loans are repaid in fixed monthly payment amounts, including interest and principal, for a pre-determined period of time. Average repayment terms range from two to five years.
• Interest rate: The interest rates on personal loans are usually fixed, meaning they won’t vary over the life of your loan. Personal loan rates may also be lower than a credit card, making them a more attractive borrowing option. Your specific personal loan rate will depend on a variety of factors
• Unsecured: Loans can either be secured by an asset (such as a mortgage loan) or unsecured, meaning approval is solely based on your creditworthiness. Personal loans are usually unsecured, though you may be able to use a savings account or Certificate of Deposit (CD) to secure a personal loan.
• Personal loan lenders: Personal loans are available from a variety of lenders, primarily banks, credit unions, and online lenders.
• Default: If you stop making payments on your personal loan, it will go into collection and you may receive phone calls, letters, and other communications from a debt collector. Defaulting on your personal loan will also have a lasting (up to 7 years) negative impact on your credit report and score. If you encounter financial difficulty and cannot make a payment, contact your lender to see if you can work it out with them.

What can personal loans be used for?

As mentioned above, personal loans can be used for just about anything. The flexibility that comes with a personal loan is one of its most desirable traits. However, it’s best to use any kind of credit, including personal loans, responsibly. When you need to borrow money, a personal loan may be a more flexible and lower-cost option than other types of unsecured debt, such as credit cards. However, you don’t want to use a personal loan for non-essential expenses, such as shopping, that you won’t be able to repay.

Here are some of the most common expenses people use personal loans for:

• Wedding costs
• Home renovations costs
• Moving expenses
• Replacing or purchasing home appliances
• Covering medical expenses
• Paying for unexpected emergency expenses
• Consolidate existing debt with a lower interest rate

What are the different types of personal loans?

The 3 most common types of personal loans: Installment, Revolving, and Line of Credit.

• Installment Loan: Probably the most common type of personal loan, installment or term loans come with a predetermined repayment schedule and monthly payment amount.
• Revolving Loan: Similar to a credit card, a revolving personal loan means you only borrow what you need to, resulting in fluctuating balances and payment amounts. Revolving loans may also come with a variable interest rate.
• Line Of Credit: A personal line of credit is another type of revolving loan. Instead of receiving a lump sum upfront, you only make draws on your credit line when you need to. Interest only accrues if you don’t repay what you borrowed by the due date. For example, many banks offer overdraft lines of credit, which are linked to your checking account and can cover the difference between what you spend and your current account balance.

What should I know before applying for a personal loan?

While online applications may make it easier than ever to apply for a personal loan, you may have more success if you take the time to prepare.

• It’s a good idea to get pre-qualified if you can.
• A hard inquiry is when a lender checks your credit history and score to make a lending decision. Hard inquiries may stay on your credit report for up to two years and lower your score by a few points.
• Know in advance how much you want to borrow and make sure you’ll be able to cover the monthly payments.
• A personal loan may come with additional fees. Ask your lender if you’ll need to pay an origination fee, which covers processing expenses, or an early repayment fee if you pay off the loan before the end of the term.
• Review your credit report (you can request a free copy from each of the three major credit bureaus at AnnualCreditReport.com) before applying to make sure there are no erroneous accounts. Lenders will use your credit history and score to determine your creditworthiness.
• You’ll need to provide proof of employment and income such as recent paystubs and W-2 forms.
• Calculate your debt-to-income ratio, which is the percentage difference between your monthly income and debt payments. For example, if you bring home $2,000/month in income and make $500/month in debt payments (credit cards, student loans, mortgage, or any other type of debt), your debt-to-income ratio would be 25%, which is below the 50% threshold that most lenders are looking for. The lower your debt-to-income ratio, the better your credit score and ability to repay the loan will be.

5 Rules of Thumb for Personal Loans

1. As with any type of loan or line of credit, only borrow what you know you’ll be able to pay back.
2. If you plan to use a personal loan for debt consolidation, first review your finances to be sure you won’t run up credit card balances again.
3. Take time to read the fine print of your personal loan offer terms so you are aware of all potential fees and penalties.
4. Consider other credit options available to you, such as a 0% APR credit card or home equity loan/line of credit if you are a homeowner.
5. Double check your reason for borrowing. Is this an essential or emergency expense? Or can it wait until you save up enough money? Only you can decide what counts as necessary, but it’s a good personal finance habit in general to delay extraneous purchases and not spend more than you make if you can help it.

Learn more about personal loans with Del Norte Credit Union!

Del Norte Credit Union (DNCU) is a member-owned, not-for-profit financial institution committed to providing unparalleled, sound and unbiased financial advice. Our knowledgeable employees can help you find the right loan option to meet your financial needs.

Learn more about the personal loan options we offer and apply online today! You can also call us at 877-818-DNCU to speak with a Service Advisor.