Financial emergencies can be a bolt from the blue. You may need additional funds for a medical emergency, to settle a debt or to support family needs. While most of us would likely be prepared to face it with a substantial amount of savings, a personal loan serves as a backup.
What is a Personal Loan?
Some banking and non-banking financial companies offer unsecured loans to their customers to meet their personal needs. A personal loan is sanctioned based on several criteria like income level, employment history, credit history, repayment capacity, etc. Personal loans can help you cope with a wide variety of financial needs. You may take one for personal, medical or family purposes, like household renovations, credit card consolidation, auto purchases, etc.
It is usually an unsecured loan as you do not need to put up any collateral (a valuable asset like your house or your car) against it. Hence, your lender can't take away any of your assets if you are unable to repay the loan. However, just like other loans, defaulting on a personal loan is detrimental to your credit report and might be a hindrance when you apply for future loans or credit cards. Also, lenders tend to charge higher interest rates for unsecured loans as compared to the secured ones.
Where Can I Get a Personal Loan?
You can approach one of the following institutions for a personal loan. All of these will assess your credit history and credit score. They will probably review other factors as well, including your current job and educational qualification before approving you for a loan
Banks
It is not very easy to get a personal loan from a bank. However, it is the most preferred option as the procedure of obtaining a personal loan from a recognized and reputed financial institution is secure as well as convenient. In all probabilities, you will approach the bank where you already have an account.
P2P Lending
Peer to Peer lending is a recent option that has opened up in this field. They offer online suggestions and options for loans which may be helpful even if you do not qualify for them through more traditional channels.
Regardless of which among the three you choose to go with, make sure that you limit the number of applications, as too many of them can negatively affect your credit score. The moment you apply for a loan, the lender will check your credit report to assess your creditworthiness. This results in a hard inquiry and you lose a few points on your credit score.
You might find other alternatives to personal loans. Payday and car title loans are among those. However, these loans are not recommended as they typically levy exorbitant interest rates and fees.
Getting a Personal Loan When Your Credit Needs Work
If you have a credit that needs work, you may consider getting a personal loan. It could be difficult to get and obviously more expensive. The lending body will evaluate your situation and your credit history before approving a loan. Interest rates might be very high if your credit score isn't good enough.
If your credit score doesn't satisfy the lending body, you might need a co-signer who has a good credit history in order to get approval for such a loan. However, in that scenario, the co-signer would be legally responsible for repaying the debt. This might complicate the situation and you are advised to think it through before taking a step ahead.
