Taking up a personal loan is one of the most convenient ways to inject cash into your bank account. However, it is important to understand how personal loans work before you take them up.
A personal loan is an unsecured amount of money that you can use for whatever purposes you want. It is unlike a mortgage or car loan where your assets are bonded against the debt.
How does a personal loan work?
Personal loans are installment loans that banks, credit unions and online lenders offer to qualified borrowers. If you apply for a personal loan, you’ll need to complete an application and submit supporting documents. The lender will underwrite your application, which involves examining your credit history and assessing the risk of offering you the loan.
Personal loan payments are typically made through equal monthly installments. A portion of each payment goes towards reducing your principal and the rest covers interest charges. You’ll also have to pay a set amount of fees (like origination, documentation, and various types of optional insurance) as well as an agreed-upon interest rate.
Most personal loans are unsecured, unlike mortgages and auto loans that require collateral to secure the loan. This makes them more available to a wider range of consumers and may be used for debt consolidation or covering emergency expenses. Typically, they’ll come with fixed monthly payments and terms that last for 2 – 5 years.
What do I need to apply for a personal loan?
To qualify for a personal loan, you will need to submit documentation that proves your identity, income and address. The exact documents required vary from lender to lender, but most lenders will request basic personal information such as your name, Social Security number or ITIN and dates of birth, as well as financial data such as your current gross monthly income and any recurring expenses you might have.
Lenders also look at your credit score and debt-to-income ratio to ensure you can afford the loan and repay it on time. If you have a low credit score or poor credit history, it might be helpful to add a co-signer who has a strong credit profile and can be held accountable for making on-time payments. Some lenders may also require additional verification of your identity, such as a government-issued ID and proof of residence. This usually requires sharing copies of your utility bill, lease agreement or bank statement with the lender.
How long does it take to get a personal loan?
Whether you are looking to cover an unexpected medical emergency or finance your dream home, personal loans may offer the necessary financial relief. Unlike credit card debt, a personal loan allows you to pay back the amount borrowed in fixed monthly instalments for an agreed tenure.
Licensed money lenders typically consider the borrower’s capacity to repay the loan in addition to his/her credit history and income. Generally, it is possible for them to lend up to six times the borrower’s monthly salary if they meet minimum yearly income criteria set by the Ministry of Law.
The loan application process will take a few days. This involves submitting documents like bank statements, proof of income and identity. The lender may also run a credit check, which can cause the borrower’s credit score to drop temporarily. Once the application is approved, the funds are disbursed to the borrower’s bank account. Some lenders may process applications faster than others.
How much can I borrow?
Personal loans are an unsecured financial scheme that allows you to borrow a fixed amount of money for a specific period. They are typically used to meet urgent financial demands such as cash flow management, debt consolidation, or funding a major purchase.
The amount of personal loan you can obtain will depend on your current income, debt-to-income ratio (DTI), and your credit score. Generally, the Monetary Authority of Singapore caps an unsecured credit borrowing limit to 12 times your monthly salary.
Licensed money lenders will also consider your current income and financial capability before approving your loan application. For this reason, it is important to choose a money lender that you trust and understand.
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