An installment loan offers an easy and convenient way to borrow money. Once you get approved for one, you’ll receive a lump sum of cash upfront. Then, you’ll repay it plus interest and fees over a set repayment term, usually in monthly payments or installments.
One example of an installment loan is a personal loan. You can use it for virtually anything: a car repair, medical bill, home improvement project, wedding, or even a vacation. Here’s a closer look at what personal loans are and how they work.
How personal loans work
Financial institutions such as banks, credit unions, and online lenders offer personal loans. While most are unsecured, some are secured, meaning you must back them to collateral or an asset you own, like your house or car. Once you pay off a personal loan, the account will close. If you want to borrow more money, you’ll need to apply for and take out another loan.
What to consider when you shop for a personal loan
Not all personal loans are created equal. In fact, there is no shortage of options available. That’s why it’s important to do your research and explore all of the personal loans at your disposal. When you do so, it’s a good idea to compare the following.
The annual percentage rate or APR on a personal loan is the total cost you’ll pay to borrow money, including all fees. It’s expressed as a percentage and charged on top of the principal amount or the money you originally agreed to pay back. The lower your APR, the more you’ll be able to save on the overall cost of the loan.
In most cases, repayment terms for personal loans range from as little as two years and as many as ten. While a longer-term will lead to lower monthly payments, it will also cost you more in interest. When you compare repayment terms, think about what’s most important to you: lower payments or interest savings.
If you have an emergency expense or need the money as soon as possible, you may find a personal loan with same-day or next-day funding. Some lenders, however, will take a few days or even a few weeks to deliver the funds.
Most personal loans come with origination fees, which are usually charged as a flat fee or as a percentage of the loan amount. These fees are often between 1% to 8% or even more. Other common fees you should look for include application fees, late fees, prepayment fees, and annual fees.
In addition to rates and fees, you may want to look into extras that make a personal loan offer more attractive. These may be discounts for enrolling in autopay, free credit score monitoring, payment date flexibility, and hardship assistance programs.
The Bottom line
Personal loans are flexible installment loans you can take out, even if you don’t have the best credit. As long as you shop around and compare your options, you’re sure to find the ideal loan for your unique budget and needs.