We all have busy lives and we spend much of them trying to keep up. We are trying to keep up with the chores at home, trying to keep up with all the crazy schedules, and trying to keep up with the bills. Sometimes, we all have moments where any one or all of those things become challenging. Life just happens, and rarely does it happen the way you plan it. You may find yourself in a place where you just cannot keep up with the bills, or there is unexpected expense.
No matter the reason, you might need a personal loan. If you are already feeling behind, needing a loan could potentially be stressful for you. It is helpful when you find out as much as you can about loans, the process and even interest rates. It may even be possible to get a prime interest rate loan, but what does that even mean? Continue reading to find out.
What Is A Personal Loan?
I am going to start with some basic information here. This can be a confusing topic, so I want to make sure that everyone understands the terms and the process. When you understand, that makes it easier for you to make an informed decision. It may not change the outcome, but at least you will know why. A personal loan is when a lender agree to let you borrow money. You then agree to pay it back in regular payment. That is the most simple definition of a personal loan. Let me explain more of the details, because they are important.
A lender can truly be anyone letting you borrow money. It can be a bank, a credit union, an online lender, or simply a friend or member of the family. The lender agrees to allow you to borrow a set amount of money and adds interest to it as a fee for giving you the money. The interest rate depends on your credit score. It is possible to obtain a prime interest rate loan. I will talk more about that a little later. You agree to pay back the money by making regular payments, usually monthly, but they can be any agreed upon interval. You and the lender agree to all the terms, including how long you have to repay the money and both of you sign a loan agreement.
The lender may have some requirements. For example, if it is a bank, the bank may require you to have a bank account with them. Most lenders require you to pay them electronically so they can take the money directly from your bank account at each interval. Lenders vary on what they consider to be default. When you default on a loan, you do not pay the loan. Some lenders feel even one missed payment is considered default and they begin to take action. Other lenders, give you a six month grace period. It is important that you find out all of those details as well as their fee structure before you sign the loan agreement.
What Is Interest Rate?
Here is where it can get somewhat confusing, but I will try to keep it simple. When you borrow money from a lender, you ask for a certain amount. Let us say that amount if $5,000. That $5,000 is the principal of the loan. The lender adds the interest rate to that. It is a percentage, such as 7 percent, of the principal amount. This is how a lender makes money from letting you borrow money. When you repay the loan, you are paying on both the principal and the interest. If you do not pay enough each month to pay the interest, then your debt will not go down.
I mentioned early (and I will mention it again) the interest a lender charges you is based on your credit score. The more of a risk that the lender thinks you are means the higher your interest rate will be. Each lender sets their own interest rate, so rate shopping works to your advantage. There are many lenders available to you, so you do not have to take the first offer you find.
So, there are a few different types of interest rates. There is a fixed rate loan, a variable rate loan, and a prime interest rate loan. A fixed interest rate loan means that your interest rate remains the same the entire time you have the loan. Your early payments are mostly paying the interest of the loan. As you pay more of the loan, you start attacking the principal. If you make any extra payments, that amount goes to the principal. This helps you pay off the loan faster.
A variable interest rate loan is well, variable, and it changes. It changes based on the prime rate. The interest rate changes which changes your payment amount. Often these loans have a locked in rate for a set period of time. After that periods ends, your interest rate can change based upon the prime rate and your payment amount changes. Often these types of loans get people into trouble because the interest rate can increase so much that the payment amount is no longer affordable. These loans are attractive because the interest rate starts lower than a fixed rate loan. Beware, they also rise quickly.
What Is The Prime Interest Rate?
So, what is all this business about the prime rate and what does it mean for you? It means more than you realize. This is why it is important for you to have a basic understanding of the prime interest rate and a prime interest rate loan. I believe there is some confusion around the prime interest rate. Many think it is set by the Federal Government. While there is a slight bit of truth to that, it is not completely accurate.
It breaks down like this…the Federal fund rate is set by the Federal Government. This is considered a benchmark interest rate and it is controlled by the Federal Government. The central bank changes the federal rate and the big name banks follow the direction of the federal rate by setting the prime rate. They are usually in line with each other, but sometimes the prime rate is .25 percent higher than the federal fund rate.
Why does the federal fund rate change? The powers that be at the Federal Reserve keep their eyes on the economy and inflation. Believe it or not, they try to control our spending by changing the federal fund rate. The more money people spend means the economy grows, but so can inflation. The central bank wants to control inflation, so they increase the federal fund rate to try to prevent people from buying items. If the economy is not doing so well, the officials reduce the federal fund rate to encourage more people to spend money. Bet you did not realize how much control the government can have over spending, did you?
Can I Get A Prime Interest Rate?
Yes, it is possible to get a prime interest rate loan, however, it can be difficult. Typically, banks reserve loans with a prime interest rate for their customers with next to perfect credit scores. Remember, this is how a bank makes money off of your loan, by charging you interest. Also, banks determine how much risk that are taking by allowing you to borrow money. If they feel you are a higher risk then they will give you a higher interest rate. This way they can make more money up front in the event you do not pay back the entire loan.
While the Federal Government sets the federal rate to encourage spending, or not, banks set interest rates to protect themselves against your potential risk. When a bank is determining how much interest to attach to your loan, the use their prime interest rate as the base rate. The percentage of the interest rate goes up depending on your credit score.
Consider this, if you have excellent credit, you might be able to get a prime rate loan, which depending on the rates could be anywhere between 5 percent to 8 percent. If you have fair credit, your interest rate could go up to 17 percent to 19 percent. If you have bad credit, your interest rate could climb as high as 28 to 30 percent. It does not take much before that interest rate increases.
How Is Interest Determined?
The interest rate for a loan usually has a few determining factors. Your credit score is only one factor. It is a large factor but there still are some other items to consider. The lender matters. Some lenders are more willing to loan money to those who are not in the best credit score shape. Online lenders and credit unions tend to fall into this category. If you have a long standing relationship with a specific bank, they may be more willing to loan you money because they know you. While you may not be able to get a prime interest rate loan, it is still helpful to do personal loan shopping so that you can find the best loan terms for you.
Another factor that makes a difference in the interest rate you receive are the amount of money you want to borrow. The more money you want to borrow makes you more of a risky proposition for the bank. It is more money they are giving you that you have to repay. The length of time that you are going to take to repay the money also makes a difference in your interest rate. If you take longer to repay, the interest rate may be higher. Your payment may still be lower even with a higher interest rate, so that is something you need to determine.
What Does My Credit Score Have To Do With It?
I have mentioned a few times in this article that your credit score drives the interest rate you receive. It also drives many other things, as well. And it can impact your ability to get a car or a home. It can impact your ability to get insurance, and in some cases, a job. Your interest rate follows you in just about everything you do, It is important that you take care of it. Life can be challenging and it is easy to get over your head in bills. It is important to pay attention to the signs and get in control of it before you lose control. This often means making compromises and decreasing spending. The good news is it only has to be for a short term while you work on improving your financial picture.
Since your credit score is important and you need to take care of it, you should know what it is. You are entitled to one free copy of your credit report per year. You should pull it and review it. Your credit report contains your credit score and a ton of other information. It has your credit history and all of your missed or late payments. Sometimes the information it contains is wrong. When that happens, you want to correct it as soon as possible. You can improve your credit score by making sure the information is correct on your credit report.
While this improvement may not get you a prime interest rate loan, it can certainly get you a better interest rate. Any improvements you can make to your credit score are helpful to you in your everyday life. It takes consistent work to maintain a good credit score, but only one or two late payments cause that number to drop.
Are There Other Kinds Of Loans?
In addition to understanding the details of interest rates, so you can know what a prime interest rate loan, there are various types of personal loans. There are secured and unsecured loans. Depending on which one you choose, it impacts your interest rate. Most personal loans are unsecured loans. This means that there is nothing to back them and the lender takes on a complete risk by lending you money. All they have is your contractural promise to repay the loan. These loans have a higher interest rate because of their risk. Few lenders are willing to give you an unsecured loan at prime if your credit is less than perfect.
Then there are secured loans. This type of loan is less risky for the lender because it has collateral behind it. The most common of these is a mortgage where you and the bank own the home until you pay it off completely. An auto loan is also a secured loan because the vehicle you are purchasing is considered collateral. The lender has a deeper sense of security when it comes to secured loans and often give lower interest rates. There is one important fact to keep in mind with a secured loan. If you default on the loan, the bank will take your collateral. They will take your house or your car.
Should I Get A Personal Loan?
You are the only person that can answer this question. I can help you by telling you the factors that determine is a loan is a smart move for you. I cannot be the one to tell you if you should get a loan. If you cannot afford a loan, you should not obtain one. It does not matter if you are able to get a prime interest rate loan, or not. The key is can you afford to make monthly payments?
A loan is not free money. You have to repay it every month. It is incredibly important to understand how the monthly payment is going to impact you. Often times, we only think about the immediate need, which is the money. We fail to look at the bigger picture, which is I have to pay back this money. There are loan calculators online that you can use to determine if you can afford the loan payment.
These calculators allow you to enter the amount you want to borrow, the interest rate and the term of the loan to give you an estimated monthly payment amount. You can play around by changing any of those factors to see how it impacts your repayment amount. This can guide you when looking for a loan that meets your needs. Not only can you ensure you are borrowing the amount you need, but also verifying that you can repay it.
Where Can I Find A Personal Loan?
There are a number of places where you can find personal loans. Although you may not be able to get a prime interest rate loan from all lenders. Typically, if you are interested in getting a prime rate loan, you need to go to a traditional lender. You should go into an actual bank and talk directly to the lender, if that is the type of loan you want. Or, let Loanry try to help you make sure you’re on the right path.
If you know that your credit is not the best and is going to impact your interest rate, you might want to look into other lenders. You can obtain personal loans online fairly quickly and easily. There was a time when online loans where for those with less than perfect credit, that really is not the case anymore. Online loans have made the process much more attractive to people. You can apply for a loan from the privacy of your own home. It only take minutes and you can upload all documents in the same place. You receive an answer in less than 24 hours and if approved, your money is your bank account in less than 24 hours from approval.
What Else Should I Know About Personal Loans?
One last thing that I would like to note is payday or fast cash loans. These are not a prime interest rate loan at all. These types of loans have high interest rates and high fees. These types of loans must be used carefully. They are not usually the loan of choice, but there are instances where they are helpful. It is all in how you use these types of loans. These loans are for low amounts and must be repaid quickly. If you know that you are able to repay the loan in the short turnaround time, then they may be useful to you.
However, if you are not going to be able to pay back this loan timely, do not take on one of these loans. You will get yourself in a worse position if you obtain one of these types of loans but cannot pay it back. And you will be hit with high fees and penalties. You should think carefully before you opt to take out a payday or fast cash loan.
Budgets Scare Me
If we are being honest, budgets scare most people. If you are the type of person who sees a budget as some form of control over you, then it might be challenging. However, if you change your perception about a budget, it should be easier for you to manage. A budget is a way for you to understand the money you have. If helps you gain a clear picture of your expenses, income, and how they relate to one another. The easiest way for you to gain control of your budget is to use a website to help you put it together.
These sites give you forms where you fill in the necessary figures to list out all of your expenses. You can see how much you are spending and where. You also can see how much you are spending compared to what you earn. I know that is the scary part for most of us, but it is also helpful. If you do not see where you are spending money, you can never get in control of it. Once you get your budget set, you can focus on reducing your debt which may make it easier for you to obtain a prime interest rate loan.
Including a Personal Loan Payment in Your Budgethttps://t.co/jwINhza6zX
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I Do Not Save Enough Money
Once you see your spending in black and white, it becomes clear fairly quickly how much money you spend. I am willing to bet it will surprise you. When you just spend money without any controls in place, your spending can be rampant. Once you see it, you quickly want to get it in check. It may also become clear to you that you do not save enough money.
If you are interested in gaining control of your credit score so you can be eligible for a prime interest rate loan, this is where you start. You must reduce your spending and take that money and apply it to your debt. This helps you decrease your debt, decrease your debt to income ratio and increase your chances of getting a prime interest rate loan.
The first step is to remove anything you spend money on that you do not use. Gym membership anyone? How many of us have them and do not use them? I hate to admit that I am one of those people. I know I need to cancel it, I just have not yet. Do not be like me…cancel that membership. Once you do that, take a look at all subscription service that you have. Do you really need them? If so, do you need them as often as you are receiving them? Can you take control and manually have items sent instead of it being automatic? All of these things can help you control your spending. Remember every dollar you save, you can use towards paying down your debt.
Those are easy changes to make and once you make those, it is time to look at the more difficult changes. The next place to look when trying to cut spending is when you spend money on eating out. This includes all types of eating out, not just dinner. When you look at the money you are spending out, be sure to look at coffee shops, snacks and the like. You should try to reduce your spending on eating out by half. Once you see the savings, you may be more willing to cut spending.
I have given a lot of information all centered on a prime interest rate loan. The truth of it is that a prime interest rate loan is difficult to obtain, even for those with the best credit. Your goal should be to decrease your spending, decrease your debt so that you can focus on improving your credit score. When you have improved your credit score, in the event you want or need a personal loan, you can get the best interest rate possible, even if it is not a prime interest loan.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.