When you hear the term “personal loan,” you might imagine loaning your friend $20 or your teenager asking to “borrow” money for something frivolous. In financial terms, what it actually refers to is a loan that isn’t secured by any collateral (like a car or house). Learn more about this type of lending in this personal loans overview.
A flexible option
A personal loan allows you to borrow a lump sum of cash. The loan can be used to consolidate debt, pay for a vacation, or for whatever else you need.
Because you don’t have to specify how the loan is used and there is no collateral connected with the loan, a personal loan offers a lot of flexibility in how it is used. In fact, you might apply for a personal loan that is intended to cover several different expenses.
How important is good credit when securing a personal loan?
Extremely important!Deb Nichols, Consumer Loan Manager at SAC Federal Credit Union, explains that the economy and competitor interest rates are two key factors used to determine loan rates. At the same time, Nichols points out that those figures will vary depending on how high your credit score is. (See SAC’s current rates.)
So how do you improve or solidify your credit score in order to be eligible for the best rates? Nichols advises:
- Be sure you make your loan payments on time
- Don’t max out your credit limits on revolving credit cards
- Don’t apply for a lot of new credit all at once
- Monitor credit reports for any incorrect reporting so that you aren’t penalized for somebody else’s mistake
In addition, Nichols advises not to close your credit cards once they are paid off because doing so may make your ratio of debt to overall credit limits higher – and could lead to a higher interest rate on your personal loan. (For more information on credit scores, read “Credit scores: A digital finger on your financial pulse.”)
Getting your loan
When it comes time to apply for a personal loan, credit unions are a smart option. Credit unions are not-for-profit entities that are owned by members, which enable them to offer comparatively lower loan rates than banks, which are for-profit institutions. And for those with less-than-stellar credit, a credit union typically has less restrictive requirements for lending.
From debt consolidation to a new refrigerator, personal loans offer flexibility and opportunity. Just remember: If you decide a personal loan is right for you, it’s important to do your research and find the best option available to you.
Have you used a personal loan? Add your advice on the process in the comments below.
Ready to apply for a loan now that you’ve completed Personal Loans 101? Stop by a SAC FCU branch or apply online.
If you need insight into your financial profile, consider taking advantage of SAC’s free Wealth Management Consultation.