Let’s get personal: Understanding how to get a personal loan
March 16, 2022 6 min read
Sue is driving her daughter to a follow-up doctor’s visit for a broken leg, thinking about paying her recent medical bills. She asks her phone’s voice assistant, "How do I get a personal loan?"
Jack has recently started a small food truck business that sells tacos. Sales are booming, but so are his credit card balances. He wants to take out a personal loan to pay off those looming bills and consolidate his debt but isn’t sure where to start.
If you, like Sue and Jack, have heard of personal loans but find yourself searching "how to get a personal loan from a bank," you’re not alone.
What is an installment loan?
When people mention personal loans, they’re often talking about a type of installment loan where you borrow a certain amount of money up front and agree to pay it back a little by little over a set period of time.1
Each payment is usually called an installment. For example, you might have a monthly payment, or installment, of $300. You’ll typically owe that amount each month for a certain number of years until you pay back the full amount.
Collateral and personal loans
Collateral is an asset, like a car or home, which might be used to pay back the loan if you are unable to send in payments for a long time.2
If a loan does require collateral, it’s called a secured loan. A home loan or a car loan would be considered a secured loan. How do they work? Well, for example, when you take out a mortgage, the home is usually used as collateral. If you miss too many mortgage payments, the financial institution that lent you the money could take your home in return for the money you received and weren’t able to repay.
Personal loans that don’t require collateral are called unsecured loans. But without collateral, the interest rate on the loan may be higher.3 Interest is a fee for using the bank’s money. That interest is typically included in your monthly installment payments.
A personal loan to pay off debt
Taking out a personal loan can also be a way to consolidate debt. This is the idea of putting all your debts together. If you have several different debts and find it hard to keep track of them, combining them into a personal loan can make it easier to focus on sending out just one payment.
You might also be able to get a lower interest rate if you consolidate debt with a personal loan. If you have credit card debt on a few different cards that have a high interest rate, you could get an installment loan to pay off the credit card debt. Instead of paying off several debts with high interest rates, you can work toward paying off one personal loan to pay less overall.
To get a deeper dive into how installment loans work, consider these two scenarios.
1. Using a personal loan to get back on track
Sue’s daughter recently broke her leg. While her daughter’s feeling much better, the incident left Sue with a few extra medical bills she wasn’t expecting.
For this reason, Sue is looking for help to get the medical bills paid. She decides to see if a personal loan might be the solution. After researching how to apply for a personal loan, Sue learns she can take one out through a bank or online lender.
Since she doesn't need collateral for this type of loan, Sue feels comfortable taking out a loan for $5,000 with an 8% interest rate. By taking out a personal loan, Sue can be better able to handle this unexpected expense without it being a huge financial blow.
2. Using a personal loan to consolidate debt
Jack had very little savings when he started his food truck business. To pay for supplies, he used his credit cards. He now has balances of $5,000 on two cards, and one card with a balance of $10,000. That’s $20,000 of debt that needs to be paid off.
Jack researches his options and finds out he can get a $20,000 personal loan to pay off his debt. Jack’s credit cards have high interest rates, ranging from 10% to 20% on the balances. Instead of paying hundreds of dollars on interest, he can save by putting the amounts together in a personal loan to focus on paying off the lump sum of $20,000. And since his loan has an interest rate of just 8%, this lowers the amount he’ll pay overall on the debt.
Understanding the details of personal loans
Even though personal loans can be helpful, it’s important to consider a few things before taking out a personal loan. Understanding what’s involved with a personal loan will help you avoid issues that could come up later. Here are a few questions to ask yourself when you are thinking about an installment loan:
Can I make the payments? Look at your monthly budget to see if you can afford the amount due each month. It can be a struggle if you’re scrambling every time an installment is due.
What will I pay in all? Like other loans, personal loans usually charge interest rates and fees. In addition to paying back what you borrow, you can expect to pay an additional amount. This can range from hundreds to thousands of dollars, depending on the loan and bank.
Is it a need or a want? While emergencies happen, sometimes it’s better to save up and use your own funds to pay for special purchases. Thinking through factors like wants and needs can be helpful when considering if a personal loan is the right choice.
|Why you might get a personal loan||Why you might save your money|
|Medical emergency||Cosmetic surgery|
|Unexpected home repair||A jacuzzi for the backyard|
|Credit card debt||A boat|
|School expenses||Bedroom decorations|
|Starting a small business||Taking up golf as a hobby|
Personal loans can be a great way to get money when you need it, like in Sue and Jack’s situations. But rushing into a personal loan for an expense you could have reasonably saved for can lead to unnecessary debt. If you do your research and understand your options, you can decide if a personal loan is the right fit for you.