10 Answers To Frequently Asked Questions About Personal Loans
Perhaps you’re looking to make some large-scale renovations to your home. Maybe you’re trying to fund a major life event, like a wedding. Or you might be looking for a way to consolidate high-interest credit card debt.
Whatever the circumstances, you need money. But how do you get it? Do you open up another credit card? Do you take out a home equity loan?
The easier and often less expensive method would be to get a personal loan. But what exactly is a personal loan? How is it any different from traditional loans? And which types of personal loans are right for you?
You might have a million questions running through your head. Luckily, we reached out to the experts at Rocket LoansSM for answers to answer these 10 frequently asked questions about how personal loans work.
1. What Is A Personal Loan?
A personal loan is an unsecured installment loan given to the borrower as a lump-sum payment. Unsecured simply means the loan is not backed by collateral such as a home, boat or car. These loans are typically available from a traditional bank, credit union or online lender, and like other installment loans, are paid back in equal monthly payments with a fixed interest rate.
Unlike credit cards, which tend to have high interest rates, personal loans have a fixed repayment term, so they often come with lower interest rates, especially if you have a good credit score.
2. What Are Personal Loans Used For?
Personal loans can be used for all sorts of expenses, like debt consolidation, home improvement, auto expenses, medical expenses, credit card payoff, small businesses, or large purchases.
However, the most common personal loan use is consolidating high-interest credit card debt. Often when you take out a personal loan, you can get a lower interest rate than a credit card, make one monthly fixed payment and save on interest by paying your debt off sooner.
3. Am I Eligible For A Personal Loan?
Since there’s no collateral, qualifying for a personal loan is ultimately determined by your credit history, income, other debt obligations and monthly cash flow.
While each lender varies, lenders typically look for a minimum acceptable credit score that falls within a range of 600 to 700+.
4. Will Getting Prequalified For A Personal Loan Affect My Credit Score?
No, getting prequalified typically won’t impact your credit score. Much like looking for the right mortgage lender, you’ll want to compare offers from multiple personal loan lenders before locking in your choice.
Most lenders perform a “soft” credit inquiry to show you prequalified offers. This allows you to compare each lender’s offerings without affecting your credit score.
5. What Documents Are Needed For A Personal Loan?
The main reason lenders ask for documentation is to help verify your identity and income. When documentation is needed, typically you’ll be asked to provide:
- Proof of identity, such as a driver’s license or another form of identification
- Proof of income and employment, such as pay stubs and/or bank statements
- Proof of address, such as a utility bill or mortgage statement
6. What Is A Secured Personal Loan?
Most personal loans are unsecured, meaning they aren’t backed by collateral, like a house or car. Your ability to get a personal loan is based solely on your financial history, like your credit profile and income.
Some lenders offer a personal loan with collateral, also known as a secured loan, when your credit history and income don’t meet their minimum requirements. By offering collateral, you may be able to receive a personal loan with a lower rate or larger loan amount, depending on your situation.
7. How Much Can I Borrow With A Personal Loan And How Long Can I Borrow?
Depending on the lender and your personal financial situation, personal loans typically range between $5,000 and $15,000, with a maximum of $45,000 and repayment terms between 24 and 60 months. The higher your credit score and income, the more money you can potentially borrow.
8. Is There A Prepayment Penalty For A Personal Loan?
When selecting your personal loan, you’ll also choose a repayment period, typically in months. If you plan to pay off your loan early, it’s important to note whether your lender charges a prepayment penalty fee. This will vary depending on your lender.
Rocket Loans does not charge prepayment penalties.
9. Why Is My Personal Loan Interest Rate Higher Than My Mortgage Or Auto Loan Interest Rate?
A secured loan on a mortgage or car loan is backed by the actual asset – in this case, the home or car, respectively. Therefore, if you fail to make payments and default, you’re at risk of losing the asset.
On the other hand, an unsecured personal loan has no collateral. Therefore, the lender assumes the risk on your promise to repay.
It’s for this reason that unsecured loans have higher interest rates: They create a higher risk for the lender. However, it’s important to assess the price of the loan versus borrowing from your home equity, for example. Sometimes the overall cost of a personal loan can be significantly lower than borrowing equity.
10. What Is A Personal Loan Origination Fee And How Much Is It?
The origination fee covers the cost of processing a loan, and it’s usually charged upfront. Like all other loans, the origination fee amount varies from lender to lender. Some lenders offer higher interest rates instead of origination fees. Rocket Loans charges an origination fee ranging from 1% – 6% of the loan amount. With Rocket Loans, your fee will be removed from your loan amount before the funds are distributed to you.
Be sure to borrow enough money for the loan amount you need and the origination fee.
The Bottom Line
Now that you’ve reviewed these personal loan FAQs, you probably understand that there’s much to consider before applying for a personal loan. Most important, however, is making sure you don’t borrow more than you can pay back. Once you’ve determined the monthly payments you’re comfortable with making and you have all of your documents and qualifications in order, you’ll be ready to start the application.
If this option is right for you and your financial needs, apply for a personal loan with Rocket Loans today.