Getting a personal loan is harder than getting a credit card. Here are some things to know about these loans.

Common purposes

Personal loans can be used for just about any purpose, provided the lender has not placed any restrictions on what you use the money for. A personal loan is typically used for:

• Significant events (like a wedding or a funeral) for which your savings may not suffice
• Debt consolidation (the loan will be used to pay off credit card balance or other debts at a lower interest rate than the debts’ average rate)
• Unexpected expenses like a medical emergency, a major home repair, or replacing an expensive appliance like a furnace

No collateral required

Personal loans are unsecured and do not require you to list any asset as collateral when you take out the loan. If you default on a payment, the lender cannot take control of your property, due to which getting a personal loan is more difficult. However, these lenders can take actions like filing a lawsuit against you, or reporting late payments to credit bureaus.

Applications

Getting a loan from a bank or credit union you have a relationship with is easier. After finding out the purpose of your loan, the bank may be able to suggest a loan better suited to your needs.

Borrow only what you will be able to repay. Ensure you calculate how much your monthly payments would be, and include them in your budget. Before choosing a lender, research to find out which lender is offering you the best deal, such as lower interest rates.

Interest and fees

Most personal loans come with a fixed interest rate, so your monthly payments are unlikely to differ. Interest rates are influenced by your credit score—the better your score is, the higher the chances of you getting a loan at a lower interest rate.

Many lenders tend to charge origination fees to set up your loan. It may be anywhere between 1% and 6% of the total amount you’re borrowing. Apart from this, if you miss a payment, the lender will charge you late fees.

Repayment period

The repayment period is usually fixed at 12, 24, 36, 48, or 60 months. Longer repayment periods mean lower monthly payments but higher interest. Therefore, it’s better to take out a loan for the shortest period convenient for you.