10 answers to frequently asked questions about personal loans

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You may be looking to do large-scale renovations to your home. Maybe you are trying to fund a major life event, like a wedding. Or maybe you are looking for a way to consolidate high interest credit card debt.

Whatever the circumstances, you need the money. But how do you get it? Are you opening another credit card? Are you taking out a mortgage?

The simplest and often least expensive method would be to take out a personal loan. But what exactly is a personal loan? And how is it different from traditional loans?

You might have a million questions running through your head. Fortunately, we contacted the experts at Rocket loans to answer these 10 frequently asked questions about personal loans.

What is a personal loan?

A personal loan is an unsecured installment loan. Unsecured simply means that the loan is not backed by collateral such as a house, boat or car. They are usually available from a bank, credit union, or online lender and, like other installment loans, are repaid in equal monthly installments with a fixed interest rate.

Unlike credit cards, which tend to have high interest rates, personal loans have a fixed repayment term and therefore often have lower interest rates, especially if you have good credit.

What is a personal loan used for?

“Personal loans can be used for debt consolidation, home improvement, auto expenses, medical bills, credit card repayment, small businesses, major purchases, or whatever life can throw at you,” explains Bill Parker, CEO of Rocket Loans.

However, the most Common uses of personal loans are to consolidate high interest credit card debt. Often times, when you take out a personal loan, you can lower your interest rate, make a fixed monthly payment, and save on interest by paying off your debt sooner.

How do I qualify for a personal loan?

Since there is no collateral, eligibility for a personal loan is ultimately determined by your credit history, income, other debts, and monthly cash flow.

Although each lender varies, they generally look for a minimum acceptable credit score that is in the range of 600 to 700+.

At Rocket Loans, for example, you need to have a minimum credit score of 640, and unsurprisingly, the higher your credit rating, the more likely you are to receive lower rates, ”Parker said.

Will prequalifying for a personal loan affect my credit rating?

Just like finding the right mortgage lender for you, you’ll want to compare the offers of several personal lenders before making your choice.

Most lenders do a “soft” credit check to show you prequalified offers. This allows you to compare the offers of each lender without affecting your credit score.

What documents are needed for a personal loan?

The main reason that lenders ask for documents is to verify your identity and income. When documents are required, you will usually be asked to provide:

  • Driver’s license or other identity document
  • Pay stubs and / or bank statements

What is a secured personal loan?

Most personal loans are unsecured, which means that they are not backed by collateral like a house or a car. Your ability to get a personal loan is based solely on your financial history, such as your credit profile and income.

Some lenders offer a secured personal loan, also known as a secured loan, when your credit history and income does not meet their minimum requirements. By offering collateral, you may be able to get a personal loan with a lower rate or a higher loan amount, depending on your situation.

How much can I borrow and how long can I borrow?

Depending on the lender and your personal financial situation, personal loans generally range between $ 5,000 and $ 15,000, with a maximum of $ 45,000 and repayment terms between 24 and 60 months. The higher your credit score and income, the more money you can potentially borrow.

Can I prepay my loan without penalties?

When selecting your personal loan, you will also choose a repayment term, usually in months. If you choose to prepay your loan, it’s important to note whether your lender charges prepayment penalty fees.

“At Rocket Loans, you will never be charged a penalty or additional fee for prepaying your personal loan,” Parker added.

Why is the interest rate on my personal loan higher than the interest rate on my mortgage or car loan?

A loan secured on a mortgage or a car loan is secured by the actual asset – in this case, the house or the car, respectively. Therefore, if you fail to make payments and default, you may lose the asset.

On the other hand, an unsecured personal loan has no collateral, so the lender assumes the risk of your repayment promise.

It is for this reason that unsecured loans have higher interest rates: they create higher risk for the lender. “It is important to remember that even with a higher interest rate, the total cost of a personal loan (finance charges) can be considerably lower than that of a mortgage, because the term is considerably shorter” Parker adds.

What are the original fees and how much are they?

“Origination fees are fees that cover the cost of processing a loan and are billed up front,” Parker explains. “As with all other loans, the amount of the origination fee varies from lender to lender.”

“Rocket Loans origination fees range from 1% to 6% of the loan amount, and they are deducted from the loan before the funds are distributed to your bank account,” Parker explains. “Some lenders do not charge a origination fee and instead increase the interest rate to reflect the cost of processing a loan.”

For this reason, make sure you borrow enough money for the loan amount you need and enough to cover the origination costs.

There are a lot of things to consider before applying for a personal loan. The most important thing, however, is to make sure that you don’t borrow more than you can repay.

If you are ready to apply for a personal loan, talk to an expert at Rocket Loans today to find out your goals for taking out the loan and how much you qualify for.

Have questions about personal loans we missed? Let us know in the comments below!


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