What is a Personal Loan and How Does It Work?

6 MIN. READ

 

Key takeaways:

 

• Personal loans can be a helpful financial tool if you need to consolidate debt or finance a big purchase.
• However, a loan has an impact on your budget, and you need to consider this decision carefully.

Credit cards aren’t the only option when looking at ways to consolidate debt or finance a big purchase. Personal loans offer another borrowing tool consumers can use when they need funding.

However, before applying for a personal loan in South Florida, there are certain things that you should know about, such as how they work and how to find the right one.

What Is a Personal Loan?

A personal loan is a one-time sum borrowed from a lender. Personal loans can be considered a type of installment credit, where the borrower pays the lender the borrowed sum plus the agreed interest in installments or monthly payments.

Personal loans usually have terms ranging from six months to five years. Personal loans in South Florida can be obtained from banks, credit unions or online lenders.

Borrowing money is an important commitment, and it will affect your budget for years to come. It’s why you should carefully consider the decision to borrow money, and you shouldn’t borrow more than you can afford to pay back.
 

How Are Personal Loans Different From Credit Cards?

Personal loans and credit cards share some similarities, but they also have some differences. With personal loans and credit cards adopting a credit score system, personal loans, unlike credit cards, give the borrower the sum in the form of a one-time payment. This means the borrower does not have continuous access to funds. A personal loan also has a limited repayment duration.

Credit card users will keep having access to funds as long as they are in good standing with their credit card company. Personal loan and credit card arrangements can contain various conditions and requirements.

A personal loan is usually best if:
 

• You need a specific amount.
• You’re looking for predictable monthly payments.

A credit card makes more sense if:
 

• You want the flexibility of a credit line.
• You need to finance a smaller purchase. 

Feature	Personal Loan	Credit Card
How you receive funds	Lump sum deposited upfront.	Revolving credit line you can draw from as needed.
Best for	Larger planned expenses or debt consolidation.	Smaller purchases, ongoing expenses or emergencies.
Repayment	Fixed monthly payments over a set term.	Flexible payments, usually with a minimum due each month.
Interest	Often lower and more predictable than credit card interest.	Can be higher than a personal loan if you carry a balance.
Approval process	Usually more formal, with income and credit review.	Often faster and simpler to apply for.
Spending limit	Based on loan amount approved.	Based on credit limit.
Fees	May include origination, late or prepayment fees.	May include annual fees, late fees, foreign transaction fees and cash advance fees.
Credit impact	Can help build credit with on-time payments.	Can also build credit, but high balances can hurt utilization.

How Do Personal Loans Impact Your Budget?

Once you borrow the money, you’ll have a monthly payment to make. Before applying for a personal loan, you should consider how this will impact your budget:
 

• You can use a loan calculator to get an idea of what your monthly payment will be.
• How much money is left in your budget after covering this payment?
• Is it enough to cover your other expenses?

Borrowing for a longer term can bring the monthly payment down for your personal loan, but keep in mind that the total cost of borrowing will go up as you pay interest longer.

Secured Vs. Unsecured Personal Loans

Personal loans can be unsecured or secured. Here’s what that means:
 

• A secured personal loan is backed by an asset, such as a car or other valuable property.
• Because the lender has something to claim if the borrower does not repay, secured loans may offer lower interest rates or better terms.
• An unsecured personal loan does not require collateral.
• Lenders approve unsecured loans based on factors like credit score, income and your financial profile.
• Since there is no collateral involved, unsecured loans can be harder to qualify for and may come with higher interest rates.

The best option depends on how strong your financial profile is, and on whether you have assets you can use as collateral. The amount you need to borrow can also be a consideration. For instance, an unsecured can make sense if you’re looking to borrow $1,000 or less, while a secured loan may give you significantly better terms for higher amounts.
 

How Long Does It Take to Receive a Personal Loan?

Various lenders have differing durations; some could take a whole business week, and others could take less than one hour. When you applied, how quickly you provided the necessary documents, and whether you met the requirements for the loan are the main factors determining how long it takes to receive your funds.

Personal Loans and Your Credit Score

Getting a personal loan can temporarily hurt your credit score because lenders may run hard inquiries, and you’re also opening a new account.

However, personal loans can help with your credit score if you’re using the loan for debt consolidation:
 

• You can borrow money to pay off credit cards or other smaller loans.
• This can be a good strategy to secure a better interest rate.
• Consolidating several accounts into a single monthly payment also makes debt repayment easier to manage.

How to Apply for a Personal Loan

Applying for personal loans in South Florida shouldn’t be complicated, but it is essential to do some research before applying for one to help speed up the process. Check around to see where you could get the best rates and be sure that you meet the requirements before applying. This will reduce the chances of your lender denying your application.

After submitting your application, you must wait for approval, which could take a few minutes or several days. When your loan is approved, you can follow the steps provided by your lender to acquire your funds.
 

What Do Lenders Look At for Personal Loans?

When applying for personal loans in South Florida, there are some essential criteria that most lenders look at. Your payment history is among these criteria, as this would give your lender an idea of your creditworthiness. Your income or salary is another factor that most lenders check; this will enable your lender to know if you can repay your loan.

What to Look For in a Personal Loan

There are several factors to consider before applying for a personal loan. Some factors vary with the type of loan you are applying for. Below, we will look at some of the primary factors to consider.
 

Upfront and Early Payoff Penalties

An upfront and early payoff penalty is a levy lenders impose for paying off your loan early. This is a factor to consider when applying for a personal loan because you won't want to pay an inconvenient sum of money when the opportunity to repay your loan early presents itself. Be sure to do your research and inquire about all penalties associated with your loan.
 

Interest Rates

Interest rates are a major determining factor when applying for a loan. However, several factors determine your interest rate, such as your credit score, loan term period and monthly payment. The goal is to get the lowest interest rate possible and a convenient monthly payment.

On average, you’ll get a lower rate with a credit union compared to a bank.
 

Need a Personal Loan? Power Financial Credit Union Can Help

If you’re looking for competitive rates, flexible terms, and a lender that puts your needs first, Power Financial Credit Union is here to help.

We offer personal loans with competitive rates, flexible terms and predictable repayment plans. We also have personal lines of credit if you’re looking for something more flexible, and secured loans to help you secure better terms with collateral.

Stop by one of our South Florida branches or contact us online to learn more about our personal loan options.
 

FAQ

What is a personal loan?

A personal loan is a one-time sum borrowed from a lender and repaid over time in fixed monthly installments, plus interest.
 

How is a personal loan different from a credit card?

A personal loan gives you a lump sum upfront and has a set repayment period, while a credit card gives you ongoing access to a revolving line of credit.
 

What is the difference between a secured and unsecured personal loan?

A secured personal loan is backed by collateral, while an unsecured personal loan does not require collateral and is usually based on your credit and income.
 

How long does it take to get a personal loan?

Timing can vary by lender, but some loans are approved within minutes while others may take several business days.