A well-balanced budget is the MVP of your finances, but even the best financial plan has its limits. Big purchases, unexpected bills, and unavoidable repairs put your budget to the test, and, depending on how much savings you have waiting in the wings, it might fail.
In a perfect world, you could put life on hold until you've saved up enough to cover these bills on your own, but most of us live in a reality where time keeps motoring on. These bills have strict due dates, and if you miss them, there are consequences.
Options like online cash advance loans and personal lines of credit may be the financial stopgap that helps you avoid late penalties on unavoidable bills — but only if you find the right one for your needs and financial situation.
Not sure what you need or why you need it? Keep scrolling — we’ll go over everything you need to know before you borrow by answering the biggest questions about personal loans.
What are personal loans?
Personal loans are any kind of loan that offers:
- a fixed amount of money
- at a certain interest rate
- used for personal reasons
- for a set period of time
This is a pretty generic way to describe your loan. As long as it’s not used for business purposes, any loan falls under this term.
To arrive at a more precise definition, you need to start filling in the questions left unanswered in the points above — things like:
- How much money can you borrow?
- What’s the interest rate?
- What are you using it for?
- How long do you have to repay it?
1. How big is a personal loan?
Although some conditions and exceptions apply, most lenders have maximum loan amounts limiting how much they can lend to their customers. These limits could be lower than $100 or higher than $100,000. How much you borrow may depend on a wide variety of factors, including your lender, your location, and your finances.
Mainstream banks often use your credit score to determine whether they should approve your application for the full amount. Alternative lenders give less weight to your credit score when reviewing your application. Although alternative online lenders may look at this score, it usually isn’t the deciding factor. They may also take into account your ability to repay your loan by looking at past and future pay.
2. What’s the interest rate?
In many cases, the interest rate applied to a personal loan depends on whether it’s secured or unsecured.
- A secured personal loan uses the borrower’s assets as collateral against the loan, which the lender could take if the loan goes into default. Houses and cars are the most common assets used as collateral, but you might be surprised by what you can use in their place. Some people have used bonds, future earning potential, and high-valued items like jewelry. Generally, secured loans have lower APRs because of the collateral you may use as a guarantee.
- An unsecured personal loan doesn’t require collateral. Lenders approve loans on their borrower’s ability to repay, appraising their credit score to determine their creditworthiness. If you aren’t sure what your score is, you can check yours for free here. People with low credit scores may have the option to apply for unsecured loans from online payday loans lenders that offer an alternative to the traditional lending system. Unsecured loans typically have higher APRs because there is no security for the lender if the borrower does not pay the loan back.
3. What are personal loans used for?
Perhaps the biggest question is why do people get personal loans? Just as the background, career, lifestyle, and living situation may differ from one borrower to the next, the answer to this question varies. The purpose of a personal loan is as the name suggests — it’s personal.
Typically, secured loans help with large, planned purchases
Some personal loans help with large, long-term investments, like a house. When the country’s median value price is $223,900 and climbing, a home is the biggest purchase most of us will ever make.
Few people can cover the cost of a six-figure property all at once, which is why a mortgage is a popular secured personal loan that the borrower can use to finance this purchase. At last count, Americans owe a total of $9.14 trillion in mortgage loans, while the FHA values the average mortgage balance at $148,060.
Unsecured installment loans help with smaller purchases — especially emergencies
Other personal loans, like a payday loan or installment loan, should only be used for small, short-term cash-flow problems. Vehicle-related expenses are the number one reason why people take out personal loans according to a 2017 Finder survey. Nearly one-third of all borrowers (or 31 percent) use them for car repairs and collisions, while 26 percent use them to cover bills and another 21 percent use them for emergencies.
Let’s say you’ve hit a rough patch with your finances. Imagine your child gets sick at the same time your hours have been cut down at work. Between doctor’s fees and your reduced earnings, you may not have a lot of wiggle room in your budget.
You know how this story goes. Circumstances outside of your control dictate your finances whether you’re prepared for them or not. Something like a frozen pipe during January’s polar vortex could have left you on the hook for a plumber’s bill. Or maybe a future fender bender you decide to pay out of pocket saddles you with a costly auto repair bill.
Without an emergency cushion in your budget, you may not have enough to cover the entire bill of your unexpected expenses until you get paid — but you have to pay these bills now. A payday loan may be a way to bridge that gap, so you can take on unexpected emergencies without delay.
You wouldn’t be alone. A 2017 Federal survey shows 40 percent of Americans would need to borrow or sell something to cover an unexpected bill of $400.
If you have nothing to sell in your time of need, you may need to find information on how payday loans work to see if they’re the right solution for your cash flow problems. Ultimately, you may end up using a payday loan to cover something other than an auto expense, but it’s designed to help you pay for one-time emergencies you’re unable to cover on your own.
4. How long are personal loans?
The terms of your loan — or the length of time you have to repay the principal (the amount you borrowed) plus any accrued interest and fees or charges — depend on whether your personal loan is secured or unsecured.
A secured loan like a mortgage or student loan may take several years to repay. In many cases, longer terms are used to offset the size of larger loans.
An unsecured loan like a payday loan is as its name suggests — you must repay what you borrow by the time of your next pay date. Because most payday loans tend to be small dollar loans, their terms are much shorter.
A payday loan is ideal when you know your next paycheck is large enough to cover the loan and all your usual responsibilities without issue. However, some people may find it hard to juggle a loan payment of this size and their typical monthly expenses, like utilities or groceries.
If these terms are too challenging for you to meet, you may find a more practical alternative with an online installment loans lender. These lenders offer an extended term involving multiple scheduled payments that usually coincide with your pay dates. Rather than having to pay back your personal loan in one lump sum, you have the opportunity to repay your online loan in installments.
This payment plan means you’ll likely pay more over time, but won’t have to promise as much of your next paycheck to your loan. If you’re able to keep up with the repayments, this option not only gives you more time to pay back what you owe, but also lets you pay off your loan without jeopardizing the rest of your budget.
A reminder about responsible lending & borrowing
Finding a personal loan that works within the framework of your budget is crucial to finding a cash flow solution that’s right for you. Part of this process involves locating a lender that’s committed to providing a responsible borrowing experience for their customers.
Before you consider sending off an application, make sure your lender has the following:
- Certification: It’s in your best interest to borrow from a lender that is a state-licensed provider in your state, following all state and federal regulations. As a direct lender, Credit Access Bureau (CAB), and Credit Service Organization (CSO) depending on the state, MoneyKey adheres to the applicable laws in every state we operate in.
- Transparency: In order to make an educated decision about your loan, you need to be in possession of all the facts. It’ll be harder when these facts are buried within complex legal writing. That’s why we make sure to disclose all our terms, conditions, and fees in clear and easy-to-understand language in all our loan agreements. Here at MoneyKey, we understand that there may be financial risks related to borrowing money, and we don’t believe in hidden fees that could increase your risk. As voluntary members of the Community Financial Services Association of America (CFSA) and Online Lenders Association (OLA), we’re also committed to following the industry’s best practices to ensure the most transparent and professional services possible.
- Customer Service: No lender should ever use intimidation tactics or harassment when servicing your loan. Our Customer Care team works 7-days a week to provide five-star service, and we’ll never use unlawful threats or abusive collection techniques when collecting on loans.
- Privacy: You’ll have to share some of your financial information at nearly every step of your borrowing experience — from applying to repaying your loan online. You need to make sure your lender follows the law with updated privacy policies that regulate how it collects, uses, and discloses your personal data. It should also have comprehensive digital security protecting its website. Since our site is the main platform for our business, we keep up with the latest SSL certificates to protect your personal information properly.
- Guidance: Although a lender’s main business is issuing loans, they should be concerned with their customer’s financial know-how, too. Strong financial literacy is a mutual benefit to both lenders and their customers, so they should help borrowers understand the basics.With a resource center packed with important information, we give our borrowers the tools they need to make better choices about their money. You may find convenient guides breaking down how budgets, savings, and credit work, so you may improve your ability to manage your money. There’s even a MoneyKey Key Thinkers Scholarship that provides up to $2,500 to four post-secondary students each year. For more information about how we celebrate academic achievement, make sure to learn about the MoneyKey scholarship before you apply.
While MoneyKey does all that we can to provide responsible borrowing, finding a sensible solution to your cash-flow problem is a two-way street. No one knows your financial situation better than you, so you’re the best judge of a loan’s fit with your finances.
Many of your responsibilities as a borrower is confirming your chosen lender has the features we outlined above by following these tips before you borrow:
- Read over the fine print: You need to understand the terms and conditions set out in your loan agreement before you sign along the dotted line. By going over your legal obligations with a fine-tooth comb, you’ll be aware of when you must repay your short-term loan or line of credit.
- Borrow within your limits: Be aware of when you’re expected to repay your personal loan and choose the option that fits with your financial capabilities. If you can’t afford to pay back a loan by the scheduled date, it’s wise to search for a loan with better terms. For example, if a small dollar loan would be too difficult to repay by your next pay date, an installment loan may be a better alternative as it involves a payment plan that coincides with multiple pay dates. You should also take into account any additional fees and interest you may have to pay on top of the principal.
- Use the appropriate loan for your problem: The small dollar payday loans, installment loans, and personal lines of credit we offer are just a small microcosm of the lush ecosystem of personal loans. To make sure you find the right fit for your finances, you should always choose the product designed for your emergency. The short-term credit options available through our website aren’t designed as long-term financial solutions, nor should you use them to pay off an existing payday loan. For help with chronic financial problems, you may need to turn to a financial advisor for advice.
It doesn’t matter if it’s your first time borrowing or if you’ve lost count of how many loans you’ve borrowed and subsequently paid off — you should look over these tips every time you borrow money.
Depending on your needs and financial situation, you may end up relying on personal loans more than the average person. Life has a way of throwing us curveballs when we least expect it, and a short-term loan may help you take action without delay.
There’s no shame in asking for help when you need it. The important part is asking for help from the right source and using your personal loan wisely.
Even the best loan with the lowest interest rate possible may be a burden if it’s misused. For more information on using an installment loan or payday loan to cover a financial emergency, contact us for more information about online personal loans in your state. There may be an option for when unexpected expenses prove too much for your budget.