Is money stressing you out? Are you currently having a hard time making ends meet? You may want to look into taking out a loan to float you through this financially difficult time.

Before you do there are some things to consider.

If you’re like most of the population, conversations about finances and money can be a touchy and oftentimes confusing subject. There’s a lot of information out there, and a lot of different options.

The tricky thing is understanding not only what your options are, but what goes along with them. When it comes to loans, it’s definitely a topic you want to understand before signing your name on the dotted line.

Here are 5 things that will help you answer the question “how does a personal loan work?”

It’s Not Free Money, Be Careful

It’s very easy to fall into the trap of thinking of a loan as free money. This type of thinking can land you in some hot water and fast when the lenders come to collect.

Whichever amount you receive from a bank or lender, always remember you will have to pay back every penny they’ve given you. In most cases, even more so if you factor in interest.

Be sure to read all the fine print of your loan before agreeing with your signature. It’s one thing to get the amount that you’re looking for, and an entirely other to realize later it was at a crazy high-interest rate.

Your Income Is Important

Your income matters when it comes to getting a personal loan. A bank or lender won’t be inclined to hand over a loan to you if you don’t have the means to pay it back. They consider this a bad high-risk investment.

You will need to be able to show a bank or lender that you have the financial means to pay back the loan in the amount of time that’s promised. Usually, they’ll look at your income history and ask for a letter of employment from you.

The amount that you make also plays a factor in how much a bank or lender will give you. If you’re not making a lot of money per month or year you shouldn’t expect to receive a large sum loan. 

Your Credit Score/History & Impact

Do some background work into your credit score and credit history as it directly impacts your loan. This will be factored in when the bank/lender calculates your interest rate and repayment time. This is something you can easily check online.

Those with a better credit score or history will typically be given preferential treatment. But this doesn’t mean that you’re out of luck if you have a bad score.

If you have bad credit or bad credit history, don’t worry because it doesn’t mean you’re out of luck! There are still options for you. 

There are lenders on the market that provide bad risk loans to individuals who are in need of it. Typically they will be at a higher interest rate, but they may have an incentive if they’re paid back by a certain time. This means you can still apply for a credit loan.

Interest Rates & Fees

Interest rates and fees go hand in hand when it comes to loans. This is where you’ll have to really pay attention to the fine print before you sign any agreements.

Your interest rate is how much money you will be charged based on a percentage of your full loan, in order to have the loan. Basically, the charge for borrowing money from the bank or lender.

Each bank or lender will look at your risk profile including everything that we mentioned above like your credit and income, but also where you live and your age. They input this into their system which will give them a statistic on how likely you are to pay the full loan back.

Once they have this number, they’re able to offer you an interest rate based on the bracket you fall into. If you’re one of the more favorable statistics? Congratulations, you’ll likely be given a low-interest loan. 

If not, unfortunately, you might be subject to a higher percentage. Either way, you will be able to access a loan.

When it comes to fees, some banks or lenders will charge administrative and other costs when issuing your loan. For example, you may have to pay a premium for loan protection to your bank or lender which kicks in in the event that you can’t pay. 

Repayment Terms

Along with your interest fee and your fees, the next step in understanding how does a personal loan work is grasping the repayment terms.

Repayment terms mean the amount of time the bank or lender is giving you before you have the pay back the loan in full. There are a few types of repayment terms possible with a personal loan.

A bank or lender can opt for you to repaying nothing until a specific date at which point you are expected to pay them back in full plus interest. They can also collect the interest fees monthly from you for the duration of the loan leaving you with repaying the full amount once the term time ends.

The bank or lender can also expect your personal loan repayment back in monthly installments, or even in its full value. This all depends on what kind of terms they are offering you.

You can see why this would be something pretty important to look over and know so that you’re not surprised when the call comes to collect. 

How Does A Personal Loan Work? Now You Know!

Now you’ve got the basics understood on how a personal loan works so you can confidently discuss with your bank or lender before signing on the dotted line.

Don’t hesitate to ask any and all questions to your bank or lender so that you have all the necessary information before making a decision.

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