What is a Personal Loan

The market right now for personal loans is hot and, believe it or not, this trend in borrowing is actually a good thing and reflects the healthy standing of the economy. Consumers are feeling the economic growth and want to take out loans for those big expenses.

What is a Personal Loan and How do they Work?

A Personal loan is a type of loan that can be used for all kinds of purposes, whether it’s to fund tuition, used for debt consolidation, home improvement projects, or even a vacation.

While there are some lenders who provide secured personal loans, the majority of personal loans are unsecured, meaning they aren’t protected by any type of collateral, such as a car, home, or other property. Instead, lenders—such as banks, credit unions and other third-party loan providers—have other qualifications you should be aware of when applying:

  • Credit Score and History. This is a big one and provides the most insight on your financial behavior as well as how likely you are to pay back your loan. While it doesn’t tell lenders everything, it shows them any delinquent accounts you may have, unpaid debts, any foreclosures or previous bankruptcies, late payments, and more details about your credit history.
  • Income and Employment History. If you’ve had five jobs in the past year and are applying for a personal loan, this could be seen as a red flag to lenders who care about income stability. You’re also more likely to get approved if you have a better ability to repay your loan or less debt-to-income ratio.
  • Monthly Installments. It’s important for lenders to know what your calculated monthly loan payments will be so they can better determine your budget and ability to pay the loan back.

Shop Around

Always give yourself time to shop around and look at multiple lenders to see what fees, interest rates, and payment plans they’re offering. You can get a personal loan from a bank, credit union, or online lender, just be sure to always read the fine print.

What You’ll Need

Let’s break down a list of what documents you’ll be needing when applying for a loan:

  • Personal information such as your name, driver’s license number, social security number, birthdate, and contact information.
  • Bank account details
  • Details on your employer, such as name, address, and how long you’ve been there.