When a person needs funding that is versatile, they may look to personal loans. Before getting a personal loan, it may be helpful to understand exactly how the process works.
The convenient thing about personal loans is that they have a pretty easy inquiry process. Understanding how that process unfolds is easy as well. In this article is a simple explanation of how personal loans work from beginning to end.
What Does a Potential Borrower Need for a Personal Loan?
In order to get a personal loan, a potential borrower will need to provide a few pieces of important information. Here is what most people will generally need when inquiring for a personal loan:
- A government issued photo ID (driver’s license, state ID, passport, etc.)
- Proof of residence (lease agreement, utility mail, etc.)
- Proof of income (bank statements, letters of income, etc.)
What Kinds of Personal Loans Are Out There?
There are generally two kinds of personal loans out there:
Secured Personal Loans
Secured personal loans require the borrower to provide an asset. This is usually done when a borrower does not meet the set requirements of credit score for eligibility. The asset adds security for the lender and makes the loan available for the borrower. The asset involved can be anything from a home to jewelry.
Unsecured Personal Loans
Unsecured personal loans are similar to the traditional lending process. Unsecured loans are an agreement between the lender and the borrower, without an asset. Those with fair to very good credit, are eligible for these kinds of personal loans.
The Characteristics of a Personal Loans
Here are some of the characteristics of most personal loans:
- The funding can be used for a variety of reasons.
- The average interest rates are from 5% to 36% of the loan.
- Generally, these loans last from one to five years.
- Loan amounts can vary greatly—hundreds to thousands.
- The process can take a few days up to a week (depending on the lender and if there is a credit check).
How Does the Personal Loan Repayment Work?
Like a lot of other loans, personal loan repayment plans will vary quite a bit. It is up to the lender and the borrower to come up with terms that will work for both.
How Personal Loan Lenders Determine Eligibility
Like every other kind of lending, there are a few qualifying factors that personal loan lenders will look at to determine eligibility:
A Credit Score/Credit History
A credit score will showcase a potential borrower’s financial habits and their level of risk. Lenders use credit scores to get a sense of the risk they are taking when working with an individual. For those with a low credit score, lenders may offer a secured personal loan instead of an unsecured one.
The lender will ask about and require proof of a potential borrower’s monthly and annual income. This is an important factor for eligibility because the lender needs to know whether a borrower has steady income to keep up with the monthly payments associated with the loan.
Ability to Repay the Loan
This final determining factor is a combination of the other factors listed above, while also being its own variable. Lenders will factor in all the information that the borrower gives them to then answer the question of whether the potential borrower can reliably pay back the loan or not.
Along with eligibility, these factors will also impact the interest rates and the repayment plan that the lender and borrower agree on.
Where Can I Find A Personal Loan?
There are generally two ways to get a personal loan:
These are lenders that give out the loan themselves. These are the most common types of lenders out there, and include financial institutions such as banks, credit unions, and some independent lenders. Direct lenders usually have fixed terms for eligibility requirements.
Indirect lenders, like MaxCash cannot give out loans themselves but instead work with a group of trusted direct lenders. Indirect lenders are usually independent companies who generally operate online or over the phone. Some are able to give out all kinds of loans. Indirect lenders have flexibility with eligibility and offer a variety for several other aspects of a personal loan.
If an individual is looking for a personal loan, it may be helpful to know about how they work. Personal loans are one of the most common types of loans out there. And figuring out how the process works is actually pretty easy.
There are a few required pieces of information that a borrower will need to provide, and then they can begin the process of finding a lender. Personal loans offer borrower’s flexibility in how they can be used and are often sought out for that reason.