Tips for Getting a Personal Loan: Types and Benefits

Personal loans play a primary role in helping us achieve our financial goals and sort out emergencies.  Sickness and destruction of property through natural calamities are some of the emergencies that prompt us to seek personal loans. We can also borrow loans to develop ourselves or accomplish some investments.  The type of loan you borrow depends on many factors such as your credit score, payment period, and loan amount. 

Before taking a loan from credit facilities and online lenders, take time to understand the loan terms. It is important to know the interest rate to avoid jumping to financial captivity. This article highlights different types of personal loans and how it works. 

Types of Personal Loans

Loans are categorized into two broad categories; secured loans, and unsecured loans. The unsecured loans are further sub-divided into different types depending on the nature, interests, and purpose. Therefore, before signing for a loan, you need to understand the terms for both secured and unsecured loans. 

1. Secured personal loans

When you borrow a secured personal loan, you provide access to your property as collateral to the lender. Access to your property can be through a title deed, logbook or business premise, or agricultural investment. 

If you fail to settle your loan by the agreed repayment timeline, the moneylender will take action. They dispose of your property to recover the loan.

A secured loan has a low-interest rate because of the security offered by the collateral.

2. Unsecured personal loans

When you borrow an unsecured personal loan, you do not offer collateral to the lender. The amount of loan the credit firm offers you depends on your credit score and credit history. If your credit score is high, you are eligible for a high loan at a low-interest rate.

Borrowers with a bad credit score are still eligible for a loan but the interest rate is high due to the risk involved.

There are many sub-categories of personal loans. Most are unsecured and have slightly higher interest rates than those of personal loans. They include the following.

• Personal Line of Credit

A personal line of credit loan is more like a credit card loan. You access this loan type when you have expenses to meet but lack enough money. Interest on this loan is similar to the credit card interest rate where you pay interest on money borrowed. 

Although you don’t get access to a lump sum loan amount, you can meet your expenses without a hassle.

• Buy Now Pay Later Loan 

Have you ever wanted to make a purchase online but realized you lack enough funds? Buy now pay later loan is the best product for you. To purchase a product online on BNPL terms, you make an initial installment and pay the balance fortnightly or monthly. 

To access this loan, you only need to download the loan app and fill in your details after your first installment. The product you are purchasing is sent to you immediately as you repay your loan in installments.

• Fixed-Rate Loans

A fixed-rate loan is ideal for you if you have a constant flow of income. The loan is charged a fixed interest rate which is distributed over a repayment period and settled in monthly installments.

Fixed-rate loans help you to avoid increased interest rates over the repayment period. The interest for the loan is calculated at the prevailing rate at the time of borrowing. It is spread over the entire repayment period.

• Debt Consolidation Loans

If you have different loans from multiple lenders, you can visit a financial institution that offers loans at lower interest rates. Give them the authority to consolidate all your loans. They will clear them and deduct a fixed monthly installment from you. 

Debt consolidation loans help you to budget for the remaining amount of money after deductions. They also allow you to plan your expenditures in the future. This is because you know the repayment period and your expected income.

• Variable Rate Loans

VRL loans have variable interest rates, their interest keeps fluctuating according to the local bank’s interest. If the interest rate on loans charged by the banks is lowered, the rate you pay decreases. It adjusts in the same manner when the rate rises. 

This type of personal loan is suitable if the payment period is short. It is also suitable if you expect the rates to fall in the future.

• Co-signed and Joint Loans

A joint loan is offered when the borrower has a poor credit score. It is also offered when the borrower qualifies for a lower loan amount. The borrower requests a person with a good credit score. This person should qualify for a higher loan amount. They are needed to co-sign his loan application form. 

Co-signing the form qualifies the borrower for a higher loan amount and lower interest rate. The two people who co-sign for a loan are liable for it. If the borrower fails to make an on-time payment, the cosigner must repay the loan. The cosigner however has no access to the funds.

• Payday Loans

Payday loans are short-term loans, normally repayable within a month or less. The loan is small, usually, a fraction of your monthly salary, and attracts high-interest rates. The amount you owe the lender is deducted from your salary on the next payday. 

High interest and short repayment periods force borrowers to reborrow after repaying the former loan. This practice keeps them in a cycle of debt. You should only go for payday loans if you lack an alternative.

• Credit Card Advance

You can access a small loan from your bank using your credit card. This loan is recovered when you recharge your account. The interest rate on a credit card debt is higher than that of a normal loan. Though convenient, you should avoid credit card advance debt because of the high rate of interest they attract.

• Cash Advance App

A cash advance app loan offers you a soft loan payable from your next paycheck. To qualify for this loan, you should have a positive credit history and link your account to the app.

If you want to continue borrowing from the app, you need to make a small monthly subscription. Your limit grows with time. You should avoid cash apps because the lenders charge high interest within a short time.

• Pawn Shop Loans

Unlike most personal loans which are unsecured, PawnShop loans are secured with very high-interest rates. To access this loan, you use your valuables such as electronics and jewels as collateral for your loan.  The lenders sell these valuables to pay for the loans. This happens if borrowers fail to clear the loan amounts within the agreed timelines.

PSL attracts interests as high as 180% and should only be an option if all the others fail.

What Should Be Your First Step When Taking a Loan?

Many lenders out there have different offers on their credit products. Take time to analyze the loan terms and conditions of different companies. Compare interest rates before submitting your loan form. 

Many banks and lenders have a pre-qualification form on their websites. You can fill it out from any browser to check how much you qualify to apply for. They analyze your bank account and credit score first. Then, they give you feedback on the highest loan you can apply for. This feedback is based on the different products they offer.

Here are some factors to consider before you choose a lender:

1. Annual percentage rates
2. Origination fee
3. Borrowing requirements 
4. Repayment terms
5. Repayment period

The product you want also determines the credit facility that meets your needs such as car loan and mortgage.

Can I Use a Personal Loan for Anything?

You should not use a personal loan for anything you wish to. Instead, use it for the projects that pushed you to go for the loan. Money from a personal loan is not a grant from your bank. It is a commitment on your pay stubs for several months or years in the future. 

Save for emergencies and medical bills, money from personal loans should be put to income-generating projects such as:

• Invest in a project that will increase your income
• Use the money to advance your career and increase your income
• Acquire an asset that appreciates to give you higher returns

Is it Hard to Get a Personal Loan from a Bank?

It is relatively easy to get a personal unsecured or secured loan from banks. To get a loan, visit different banks’ websites. Analyze their requirements first. Then, seek advice from the customer care desk. 

The main requirement for most local banks is to have a functional bank account with them. Alternatively, a paycheck with an account in another bank is also required. 

Here are the steps to follow when applying for a loan from a bank.

1. Fill out a pre-qualification form to check your eligibility for the loan. To qualify for the loan, you must:

• Be 18+ years of age
• Have a national ID
• Have a registered phone number
• Have a valid account number

2. Once the loan officer ascertains your eligibility for a loan, they will analyze your credit history. They will also review your bank account activity and your last paycheck to determine your creditworthiness. 
3. If you qualify for an unsecured loan, the loan officer will get a copy of your credit report
4.  Before applying for a loan, you have to clear with the credit bureau by paying all your outstanding bills
5. First, read and understand the loan terms. Show a willingness to pay your loan. Provide evidence of early payments. Then, you can fill out and sign a loan application form.
6. Different banks take different duration to approve loans depending on the amount and type of loan. Once your loan is approved by the bank, you should visit the bank’s portal. Approve the loan before it is disbursed to your account.

It is not always automatic that you get a loan from a bank once eligible. Some factors that can make you be disqualified from accessing a bank loan include:

• High debt to income ratio
• Low credit score
• Too much debt
• Failure to sign your loan application form
• Missing information on your form
• Unstable employment history
• Bad credit history

How to Take a Personal Loan?

Taking a personal loan to meet your financial needs is simple. Here are five steps to follow when taking a personal loan from online lenders, banks, and other financial institutions.

• Work out your financial requirements

Before you take out a loan, determine your financial needs. Create a plan on how you will utilize the money.

• Check if you qualify for the loan

Your current flow of income shows the amount of loan you can manage to pay. Your savings account also influences this amount without straining your current income. To find out how much you are eligible to borrow, you can use the online eligibility calculator.

• Apply for the loan

After you find out how much to apply for, visit your nearest branch. Talk to the loan officer to get an application form. Fill in all the required details. You can also visit their website and apply online.

• Submit Loan application documents to the bank

You should ensure the information in the application form is accurate to avoid disqualification. Other than the loan form, the bank requires other documents that prove your financial position and identity. These documents include an identity card, salary payslips, bank statements and revenue returns certificate.

Key Takeaways

1. Personal loans are a great way to cater for emergency expenses and realize our financial goals.
2. Seek expert guidance before making any financial decisions to avoid costly mistakes on our finances
3. Before you take a personal loan, investigate its requirements to avoid unnecessary prepayment penalties.

Money from loans is part of our future income. We should be accountable for funds from loans and only borrow when unavoidable. Only invest loan money if the returns will boost your income.