Are you thinking of taking out a personal loan? Here are some of the things you need to know before making your decision. But first, what exactly are personal loans? Personal loans are a form of installment loan whereby you borrow a fixed amount of money and repay it with interest in monthly installments over the life of the loan. Your account is closed once you complete your loan payment. In instances where you need extra money, you will need to take out a new application for the loan.

Know the difference between secured and unsecured loans

With an unsecured loan, the lender will assess your credit score and financial history and decide whether you are a suitable risk when it comes to borrowing money. If you do not qualify for an unsecured loan, you may be offered a secured loan instead. A secured loan is borrowed against an asset, such as a high-value item or home equity. They are usually offered at more favorable rates because the lender is free to claim your assets if you default on your payments.

Understand the impact on your credit score

Taking out a personal loan may lower your credit score because the lender must run a check against your credit as part of the application process. You should, therefore, check the rates with lenders that do soft pulls to ensure your credit score will not be affected.

Shop around to find the most competitive rates

Depending on your credit and lender, interest rates for personal loans may range between 5% and 36%. If you have outstanding credit, your interest rates will be lower. Also, if your loan repayment period is lengthy, you are likely to pay more interest. Some lenders also charge an origination fee, which ranges from 1 to 5% to cover the cost of loan processing. What's more, you should be aware of the prepayment penalties involved in personal loans where the lender charges a certain fee if they feel that you have repaid your loan early, causing them to lose out on the interest that they would have otherwise earned. Ensure you shop around to find the most competitive rates, and of course, before signing any loan agreement, make sure you carefully understand what it entails and all the costs involved.

You don't have to get your loan from the bank

Aside from banks, there are many other places you can acquire your loan. Consumer finance companies, credit unions, and even online lenders can provide you with a personal loan. Remember to be careful when borrowing online and always pay due diligence. You can check with the Consumer Financial Protection Bureau to ensure that you are dealing with an authentic lender. Or why not try FinanceFinderPRO to find the best personal loan for you.