Personal loan. It’s such a general term that can theoretically be interpreted many different ways.
For instance, back in the day, people would simply write “IOU” on a piece of scratch paper, a veritable handshake promise that you’ll eventually pay your buddy the 20 bucks you borrowed. A college student living on ramen noodles may get a small “loan” from their parents to make ends meet—and maybe pay it back.
In the financial world, personal loans represent a small percentage of consumer debt—but have increased in popularity over the years. In a nutshell, a personal loan is a fast and efficient means of getting a lump sum of cash for a variety of purposes.
“The intention of a personal loan is to flatten out the hills and valleys of expenses,” said Laurence Harrison, Senior Loan Officer at SELCO.
Do you need to flatten out a few hills and valleys? Let’s further explore this type of debt to help determine if it’s right for you.
How does a personal loan work?
A personal loan is generally unsecured, which means it doesn’t require collateral such as your house or vehicle. Like any loan, the annual percentage rate (APR) you’ll receive is dependent on your credit score, credit history, debt-to-income ratio, and cash flow. Because of this long list of requirements (and lack of collateral), interest rates vary greatly for a personal loan (and they can be pretty high)—the typical range is 6%-36% APR. Visit selco.org to see current rates for SELCO’s Personal Signature Loan (terms up to 48 months) and other loan types.
“Personal loans, despite their higher interest rates, are a great financial tool when life’s surprises surprise you,” Harrison said.
When does a personal loan make sense?
A personal loan certainly isn’t one-size-fits-all. When the going’s good, a personal loan can be used for many expenses—wedding or funeral costs, paying for a dream vacation, emergency medical bills, funding an adoption, making a large purchase during the holidays. When times are tough, a personal loan at the lower end of the interest rate spectrum can do wonders for consolidating your higher-interest credit card debt.
When does an unsecured personal loan not make as much sense? Examples include when you have solid collateral to buy an RV or enough equity in your house to fund your home improvements.
“SELCO's loan officers will look for ways to get you the funds you need via a secured loan as necessary,” Harrison said. “With collateral, there’s lower risk, you have a better chance at a favorable rate, and it puts both the credit union and our members in a better position.”
Anything else I should be aware of?
There are a few other important factors to consider before taking the plunge on a personal loan:
- The maximum loan amount may not be much. When a borrower doesn’t have a piece of collateral to fall back on, lenders tend to be more tight-fisted. At SELCO, the most you can borrow in unsecured loans is $25,000. For example, if you have a SELCO Visa Platinum® credit card with a $10,000 limit, the maximum you could take out in a personal loan would be $15,000.
- Personal loans aren’t always flexible. In some cases, a personal loan you’re approved for will be deemed “direct pay.” What this means is you would not see the money deposited into your account. Instead, it will be sent directly to whomever the money is owed. An example of this scenario is when the entirety of your loan would be delivered to credit-card companies.
- Your credit score will be impacted. As with other forms of credit, make your payments on time, and you’ll build credit. Of course, there’s always the risk of paying late or defaulting on your loan, which can can hurt your credit score. Formally applying for a personal loan can take points off your credit score, but the score can bounce back very quickly after inquiries.
“A personal loan is not the same as a ‘payday loan,’” Harrison said. “If you’re having difficulty with car payments or rent, a personal loan may not be the right solution.”
Now that you’ve studied the ins and outs of a personal loan, it’s time to decide if one is indeed what you need (or want). If you already know the answer is yes, schedule an appointment with a SELCO Loan Officer or apply today to get the ball rolling.
