How Do Personal Loans Work?

Are you interested in a personal loan, but not sure how they work? Learn what you need to know about applying for and getting a personal loan.

What exactly is a personal loan, and how do they work? Many first-time borrowers want to understand the advantages and disadvantages of applying for a personal loan – as well as what this type of loan can be used for and how the application and repayment processes work.

It’s also important to learn how a personal loan might impact your credit score and whether using one to consolidate high-interest debt is a good idea or not.

At A+ Federal Credit Union, we offer flexible personal loans that give our members the freedom of choice. Our fixed, low interest rates make it possible for you to achieve your financial goals. Keep reading for everything you need to know about these loans.

How Do Personal Loans Work?

There are two main types of loans: secured loans and unsecured loans. Secured loans, such as home and auto loans, require collateral, whereas unsecured loans, like personal loans, don’t.

A personal loan allows you to borrow a certain amount of money to use for personal reasons. The loan is then repaid over time with interest.

When Is It A Good Idea To Apply For A Personal Loan?

There are various situations where applying for a personal loan makes sense. For instance, many homeowners take out personal loans to fund home improvement projects, like installing a pool or replacing the roof. A personal loan enables you to complete the project without depleting your savings or using your home as collateral.

Next, a personal loan can help you pay off high-interest debts. By securing a personal loan with a lower interest rate, you can pay off the high-interest debt and save more money over time.

Many borrowers ask if it’s worth it to pay off debt with a personal loan, and the answer depends on your circumstances. If you have several high-interest debts, such as credit card debt, you can consolidate your debt with a personal loan and turn multiple payments into one.

Personal loans can also help cover emergency expenses, such as medical emergencies, car repairs, or urgent home repairs. If you don’t have enough money in savings to cover unexpected costs, applying for a personal loan is an accessible way to access funds quickly.

Lastly, you can use a personal loan to make larger purchases – such as home furnishings or unexpected expenses. This is a great option for items you plan to keep for several years. While you’ll pay some interest on the loan, you’ll be able to purchase the item and enjoy it sooner.

The Application Process For Personal Loans

Applying for a personal loan is a multi-step process, but it can be done quickly. If you’re applying for a loan at a federal credit union, the first step is to meet the member eligibility criteria. Next, you complete the loan application by supplying personal, employment, and financial information.

Once you submit your application, the credit union will conduct a credit check. Your approval will be based on your creditworthiness, income, and other factors. If you’re approved, the credit union will determine your loan amount and interest rate.

Next, the credit union will provide you with the terms of the loan, which should include your loan amount, interest rate, repayment plan, and any additional fees associated with the loan. By signing the loan agreement, you’re accepting the terms of the loan.

The final step is for the credit union to disburse your funds. Most personal loans are disbursed all at once, and you can designate which account you’d like the funds to be transferred into. Once the loan funds are deposited into your account, the repayment period will begin.

How Is A Personal Loan Paid Back?

Personal loans are repaid in monthly installments over a predetermined period until the full amount is settled. Each monthly payment includes both the principal and the interest.

The best way to manage your loan repayment plan is to set up automatic monthly payments from your bank account. With automatic payments, you won’t need to worry about remembering to make your payments each month.

However, you do need to make sure that you have enough money in your bank account to cover the payment on the day it’s withdrawn from your account. It’s important to account for your loan payment in your monthly budget so that it’s always covered.

You can pay back your personal loan sooner by making additional payments on top of your minimum monthly payment. Doing so will pay off the principal faster and save you money on interest in the long run.

Is A Personal Loan Bad On Your Credit?

There are a few ways that a personal loan can impact your credit score. Initially, applying for a personal loan requires a hard credit check, which can temporarily lower your credit score. However, consistently making on-time monthly payments will help your credit score recover and improve over time.

A personal loan can positively influence your credit because it adds diversification to your credit mix. Making on-time monthly payments demonstrates that you’re a reliable and responsible borrower, which can enhance your credit profile.

However, it’s important to understand that missed payments can negatively impact your credit, which is why it’s crucial to stay on top of your loan repayment plan. As long as you do so, it’ll have an overall positive impact on your credit score and history.

Do You Get Money Right Away From A Personal Loan?

Curious if you get money right away from a personal loan? Most personal loans are deposited within a few business days of approval. However, some financial institutions can deposit the money on the same day you get approved. The time it’ll take will depend on the financial institution you’re borrowing from and their practices.

Is It Worth It To Get A Personal Loan To Pay Off Debt?

As mentioned above, using a personal loan to pay off debt can help you save money on interest over time and consolidate your monthly payments. Whether or not it’s worth it for you will depend on the interest rate of your existing debts and the interest rate you’re approved for on your personal loan.

As long as the interest rate of the personal loan is lower than your existing debt, it’s worth it to pay off debt with a personal loan. However, it’s vital to stay on top of your personal loan payments.

A+FCU Personal Loans

At A+FCU, we offer personal loans designed with Texans in mind. Our personal loans give you the freedom to decide how to use your funds, and we offer repayment terms of up to 84 months.

Additionally, we offer low, fixed rates as low as 8.99% APR.* Estimated payment terms are $16.08 per $1,000 per month for 84 months.

We’re here to help you achieve your financial goals so you can live your A+ life. Whether you want to consolidate debt, pay for a vacation, or make home renovations, our flexible terms can help make your dreams a reality.

Have more questions? Our team provides dedicated and personalized assistance throughout the entire personal loan process.

*APR=Annual Percentage Rate. 8.99% APR is for up to 84 months and includes 0.25% rate reduction for automatic payment from A+FCU account or electronic funds transfer from another financial institution. Cannot use PlusPoints to lower rate. Actual rate may vary depending on each individual’s credit history and underwriting factors. Rate may increase if automatic payment is cancelled. $16.08 per $1,000 per month for 84 months. Minimum loan amount of $2,500. Terms from 6-84 months. Maximum 18.00% APR. Rates as of 9.16.2024.