March 25, 2022
Do you have a lot of medical bills due to a recent injury? Are you frantically trying to figure out how you are going to be able to pay it off? Well, personal loans are a viable option.
Maybe you have a lot of credit cards and it is too much to repay them all at once. Even if you are paying the minimum on each card it can easily add up. Now you want to know how you can consolidate your debt and make just one monthly payment. Personal loans can help you avoid paying high-interest rates and large monthly payments.
If you are online researching how to get a personal loan from the bank, you are not alone.
Related: The Best Personal Loans of 2021
How does an installment loan work?
The term “personal loan” often refers to a form of installment loan, which involves borrowing money upfront and paying it back over a period of time. (1)
Payments are usually referred to as installments. A $300 monthly installment, for example, is part of a $300 payment plan. For a certain number of years, you’ll generally be responsible for paying back that amount each month.
A personal loan secured by collateral
You might use collateral, such as a car or home, to pay back the loan if you are unable to make payments for a long time.
A secured loan is one that requires collateral. A secured loan would be a home loan or a car loan. What is the process? In most cases, your home is used as collateral when taking out a mortgage. Financial institutions that lend you money might take your home if you miss too many mortgage payments.
A personal loan with no collateral is called an unsecured loan. A loan without collateral often has a higher interest rate. (3) The bank charges interest to use its money. Your monthly payments usually include interest.
Paying off debt with a personal loan
Debt consolidation can also be accomplished through a personal loan. You combine your debts through this method. It can be difficult to keep track of several different debts, so combining them into an installment loan can simplify things.
When you consolidate debt with a personal loan, you might also be able to get a lower interest rate. A high-interest credit card debt could be paid off with an installment loan if you have several different cards with high-interest rates. To pay less overall, you can work towards paying off one personal loan rather than paying off several debts with high-interest rates.
Take a look at these two scenarios to understand installment loans better.
Related: Printable Debt Payment History Tracker
1. Get back on track with a personal loan
Say you got into an accident and broke your leg. While you are doing better it has left you with a lot of medical bills you were not expecting.
Therefore, you are in need of help paying your medical bills. Hence, you look into personal loans. Research reveals that an online lender or a bank can help you obtain a personal loan.
You choose to take out a loan of $5,000 at 8% interest since you do not have to put up collateral for this type of loan. You can handle this unexpected expense better with a personal loan, as it won’t be such a monumental financial burden.
2. Consolidating debt with a loan
When you first started your food truck business, you had very little savings. Therefore, you used a credit card to pay for supplies. Two of your cards have $5,000 balances, while one has a $10,000 balance. The total debt is $20,000 which must be paid off.
As a result of your research, you find out you can get a loan for $20,000 to pay off your debt. Your credit cards charge high-interest rates, between 10% and 20%. By putting the amounts together in a personal loan, you save hundreds of dollars in interest and can focus on paying off the lump sum of $20,000. Due to your loan’s 8% interest rate, you will pay less overall on the debt because of this.
Getting to know personal loans
Before taking out a personal loan, you should consider a few things. It’s important to understand what a personal loan entails in order to avoid any problems down the road. If you are considering an installment loan, here are some questions you should ask yourself:
Am I able to make the payments? Determine if you can afford the amount due each month by looking at your monthly budget. When you are scrambling to pay each installment on time, it can be a struggle.
How much will I pay in total? These types of loans require interest and fees, just like other loans. You will also have to pay back the loan plus an added amount. These sums can vary from hundreds to thousands of dollars, depending on the loan and the bank.
Do you need it or do you want it? Occasionally, it’s better to save up and pay for special purchases with your own funds rather than using an emergency fund. When considering whether a loan is right for you, it is helpful to think about factors such as wants and needs.
| Why you might get a personal loan | Why you might save your money |
|---|---|
| Medical Emergency | Plastic Surgery |
| Unexpected Home Repair | A Jacuzzi |
| Credit Card Debt | A Boat |
| Student Loans | Home Decorations |
| Starting a Business | Taking up Sports as a Hobby |
When you need money, personal loans can be a helpful option. You can, however, incur unnecessary debt by rushing into a personal loan for an expense you could have reasonably saved for. You can determine if a personal loan is right for you by doing your research and understanding your options.
This site is for educational purposes. The material provided on this site is not intended to provide legal, investment or financial advice. For specific advice about your unique circumstances, you may wish to consult a qualified professional.
- What is a personal installment loan? (December 2, 2021). Retrieved March 24, 2022, from https://www.consumerfinance.gov/ask-cfpb/what-is-a-personal-installment-loan-en-2114/.
- What is collateral? (undated). Retrieved March 24, 2022, from https://www.bankrate.com/glossary/c/collateral/.
- What is an unsecured loan? (June 24, 2021). Retrieved March 24, 2022, from https://www.bankrate.com/loans/personal-loans/unsecured-loans-definition/.
