How Personal Loans Work & What They Can Be Used For

A personal loan is a popular way to bridge a shortfall of cash. They can be used for everything from purchasing new assets to paying for medical emergencies, vacations, and more.

The way a personal loan works is you pay a fixed rate of interest on the sum you borrow, repaying it in monthly installments. As with most consumer finance products, there are a lot of options to choose from when it comes to personal loans. The lender and loan offer you go with can make a huge difference to how much value you get out of the loan.

Here’s more information on personal loans, how to secure a good deal for yourself, and the different things they can be used for.

How Personal Loans Work

A personal loan isn’t all that different from borrowing on your credit card, except that you have to solicit offers. Essentially, you approach different lenders, choose the best loan offer, and pay it back over a period of time, usually between one to seven years.

There are different factors that go into making a loan offer perfect for you:

1. Loan Amount

This is the amount of money you’re entitled to borrow. Typically, lenders will advertise anywhere between $1,000–$100,000, but it’s often decided on a case-to-case basis. If one lender isn’t willing to offer you the entire amount you need, it’s a good idea to shop around, as another one might.

2. Interest Rate

The annual percentage rate (APR) determines the amount of interest you pay on your loan and therefore your monthly installments. APRs range from around 5.99% to nearly 36%. The way personal loans work is your interest rate is often determined based on your credit score, credit history, and outstanding debt. However, alternative lenders will often take a wide range of criteria into account.

3. Payback Period

You can choose between a shorter payment period that allows you to quickly pay back the loan, but in larger installments, and a longer payment period that allows you a more relaxed payment schedule. The longest payment period, of up to seven years, is usually offered to people with an excellent credit profile.

4. Lending Criteria

The right lending criteria can be the difference between a personal loan that works out and one that doesn’t. Depending on the situation, some lenders may ask for collateral or a co-signer in order to approve the loan. However, the vast majority of personal loans are unsecured. They may also ask for different supporting documents, including proof of income and employment status to more lenient criteria such as utility payment history.

The best loan terms are offered to people with excellent credit — typically FICO scores of over 700 and excellent repayment history. However, not all lenders follow this format. Alternative lenders, such as Lending Tower, make it a point to consider a wider range of criteria when granting personal loans.

Mistakes To Watch Out For

Sometimes, when a personal loan doesn’t work out the way you intended it to, it may be down to a common mistake, such as:

• Not Exploring All Your Options: It’s a good idea to cast your net as far as possible and gather offers from multiple lenders. Alternatively, you could reach out to Lending Tower; we make it a point to source tailored offers from multiple trusted partners so you have all your options available in one go.

• Choosing a Very Long Payback Period: While paying smaller monthly installments over an extended period may seem like a good idea, it also means you’re paying more interest over the life of your loan.

• Ignoring Fees, Penalties, and Fine Print: The way personal loans work is that lenders may often attach origination fees, which can increase the amount you pay back. There may also be costly penalties for defaulting and other details hidden in the fine print that may put you in a fix down the line.

What a Personal Loan Is Used For

The reason a personal loan is so popular is that it’s very versatile. You can use it for a very wide range of purposes.

• Debt Consolidation: Consolidating your high-interest credit card debt into one fixed-rate loan can reduce your monthly payments and potentially save you thousands of dollars a year.

• Major Purchase: Whether it’s a car, an air conditioner, or even an investment asset, a personal loan can work well to help you pay for it.

• Home Improvement: Whether your home improvement project is functional or aesthetic, a personal loan can prove ideal.

• Financial Emergency: You can use a personal loan to pay for a medical emergency or any sudden unavoidable expense that comes up.

• Events: Personal loans can help pay for important life occasions, such as a wedding or even a vacation.

Make Your Personal Loans Work for You With Lending Tower

Lending Tower is a top BBB-accredited company and a trusted financial partner for thousands of customers across the U.S. Our personal loans are very flexible and we’re able to accommodate a wide range of applicants, regardless of your financial history. See highly competitive rates, starting at 5.99%, and see funds deposited into your account as quickly as 24 hours. Check your potential rate or reach out to one of our loan advisors 24/7 to get started.