How Do Personal Loans Work? | PaydayMint
Personal loans are a popular option for consolidating and financing debt; make sure you fully understand how it works and the terms of a personal loan before you sign.
Ten years ago, consumers only had two choices for borrowing money: getting a high-interest credit card and borrowing money from the bank. Without excellent credit, this was hard to do. The 2008 recession changed all that.
FinTechs are financial technology startups that offer personal loans to customers. Banks did not lend much to consumers. FinTechs created a new market using new underwriting data and algorithms that can predict risk.
TransUnion, the credit rating agency, reported that 2018 saw an unprecedented increase in unsecured personal loans to $138 million. This growth is largely due to FinTech loans. The average loan size in 2018 was $8,402. That’s 38% more than the 5% that was recorded five years ago.
Related: Compare Personal loan Rates
What personal loans are
There are many types of available personal loans. There are many types of personal loans available.
The most popular personal loan is unsecured. Unsecured loans are the most popular personal loan. In some cases, this could increase borrowing costs.
Unsecured personal loans can be used to finance large-scale purchases, such as weddings and vacations, consolidate student loans or reduce high-interest credit card debt.
Personal loans are issued as a lump sum and deposited into your bank account. A personal credit line can be available for those who aren’t sure how much credit they need. It can adjust to the market interest rate, which means it can change.
How much you can borrow will depend on your credit score
Personal loans are based on your credit score. It can be as high as 300-850. This is based on your financial history and other factors.
Many factors determine your credit score.
Your credit card debt is the second most important part of your credit score. It is calculated in relation to your credit limit. This is also called the credit utilization ratio. It measures your credit limit and credit card debt.
Lenders consider more than just your credit score. Lenders consider more than just your credit score. They will also look at your income, work history, and total debt.
Personal loans require you to have high credit scores.
Personal loans can be used to finance large purchases, pay off high-interest credit cards, or eliminate other high-interest debts. Your monthly payment will be lower the longer the term.
There’s a trade-off. A personal loan interest rate goes up the longer you borrow.
Consider a personal loan from SoFi. A $30,000 loan would cost a borrower with good credit 5.99% for three years and 9.06% for seven years.
Lenders may also charge an origination fee, which is the cost of processing your loan application. This will show you the total price of your loan.
If you have excellent credit, a personal loan may be an option to finance large purchases or consolidate debt. This will help you get rid of higher-rate debt.