A personal loan can be a powerful tool for financing senior living. This article will explore the different types of personal loans, their terms, and how to choose the best personal loan to fit your financial needs.
What is a personal loan?
A personal loan is borrowed money from a financial institution for personal expenses. It is repaid over a predetermined amount of time in monthly installments, including interest.
How do personal loans work?
Each personal loan has four main components:
- Interest rate: A borrower is charged interest on their loan at an annual percentage rate. Financial institutions typically determine the interest rate using credit scores, loan amount, and the loan’s repayment timeline. Borrowers should consider comparing interest rates from a variety of different financial institutions.
- Monthly payment: Each monthly payment includes a percentage of the initial principal with the loan’s interest.
- Repayment timeline: Borrowers must repay personal loans by their predetermined maturation dates.
- Origination fees: Not all personal loans include an origination fee, but many lenders do charge an upfront fee to take out a personal loan.
Types of personal loans
Secured personal loans
A secured personal loan is backed by collateral. The loan’s collateral can either be an asset or cash. Typical assets borrowers use to secure a loan include vehicles, homes, property, or permanent life insurance policies.
Types of secured loans include
- Vehicle loans.
- Mortgage loans.
- Secured credit cards.
- Home equity line of credit (HELOC).
- Life insurance policy loans.
Pros: Since a secured personal loan presents a lower risk for a financial institution, borrowers can often obtain a lower interest rate.
Cons: If the borrower defaults on the personal loan, the financial institution can seize the collateral. Additionally, borrowers without sufficient collateral are ineligible for this type of loan.
Unsecured personal loans
An unsecured personal loan does not require a borrower to present collateral. A financial institution will consider a borrower’s credit score and income level to determine if lending money is worth the risk.
Types of unsecured loans include
- Student loans.
- Credit cards.
- Personal lines of credit.
Pros: Unsecured personal loans may be easier to obtain, as they do not require collateral.
Cons: Since the risk of default on an unsecured personal loan is higher for a financial institution, they typically come with higher interest rates. A financial institution can also bring a borrower to court to collect delinquent debts.
Co-signed and joint loans
A co-signed personal loan involves a third-party agreement to repay the loan amount if a borrower defaults. A co-signer will not have access to the personal loan’s funds. Typical co-signers are family members or close friends.
A joint personal loan involves two borrowers signing for a loan. Unlike a co-signer, a co-borrower on a joint personal loan is able to access the loan’s funds. Typically, co-borrowers are business partners or spouses.
Pros: Adding a co-signer or co-borrower to a personal loan decreases the financial institution’s risk, which typically lowers the loan’s interest rate.
Cons: All parties involved in the loan are still liable for its terms if one party fails to meet the financial obligations.
Loan interest rates
A fixed-rate personal loan offers a set interest rate that guarantees a set monthly payment for a borrower. A fixed-rate personal loan provides a borrower with a level of predictability to ensure a balanced budget.
A variable-rate loan is tied to a benchmark rate that a financial institution sets. When the benchmark rate changes, a borrower’s monthly payment changes. Depending on current interest rates and the repayment timeline, a borrower may ultimately end up paying less in interest with a variable-rate loan. There is also the risk of higher payments if the Federal Reserve raises interest rates — as it did in June 2022.
How to get a personal loan
Considerations for qualifying
A borrower should consider a variety of factors before taking out a personal loan:
- How much to borrow. A financial institution may approve you for a loan up to a certain amount, but since the interest rate is a percentage of the initial loan amount, you can potentially save money by only borrowing what you need.
- Monthly payments. Can you afford the monthly amount owed on the personal loan?
- Credit score. It is always best to know your own credit score before a lender makes a hard inquiry. Many lenders base the loan amount, terms, and overall approval on a borrower’s credit score.
- Type of lender. There might be other lending options that provide better terms for your given situation.
Steps for getting a personal loan
Once you are certain a personal loan is the right financial choice, follow these steps:
- Choose a financial institution. There are two types of financial institutions: banking and non-banking. A banking institution has a banking license and is governed by the Federal Reserve, FDIC, OCC, and NCUA. Banking institutions like local banks and credit unions are allowed to accept deposits. Non-banking financial institutions, such as peer-to-peer lenders, insurance companies, payday lenders, and online finance companies, cannot accept deposits and aren’t federally regulated. Their loan interest rates are often higher, but they may approve a loan that a banking institution wouldn’t.
- Check eligibility. Visit the financial institution’s website or call the lender to learn about personal loan requirements, such as minimum credit score, income threshold, or debt-to-income ratio.
- Get prequalified. Most financial institutions allow borrowers to perform a soft inquiry to ensure they fit the general loan guidelines. Contact the financial institution to prequalify.
- Examine loan details. Examine the loan’s amount, monthly payment, interest rate, and interest type to determine the penalties for prepayment and arbitration agreements.
- Apply for the loan. Submit your loan application. Coordinate multiple applications in a 14-day to a 30-day timeframe to minimize the impact on your credit score.
Looking for a personal loan to cover senior living? Visit ElderLife Financial Services to browse your options.