Whether you’re trying to make up your rent payment, or you really need to get a car and don’t have enough money, a personal loan might just be what you need.
An unsecured personal loan could help sort all your budget problems without risking any assets, but only if properly used.
Personal loans might not be the right choice for everyone and just like other types of loans, rates for Personal loans depend on your income, credit score, credit history, loan type and terms, debt-to-income ratio etc.
What Exactly Is A Personal Loan And How Does It Work?
A personal loan is any money you can borrow in one lump sum for a variety of purposes such as an unexpected medical bill or moving expenses. It is a type of instalment loan gotten from a bank, credit union or an online lender and is often within the ranges of $1,000 to $50,000. They are also sometimes called unsecured or signature loans which means collateral is not required to secure the loan. Some specific lenders can impose restrictions on what they can be used for but mostly they can be used for anything. Personal loans have fixed interest rates on them.
The process of applying for a personal loan is quite easy and is just like applying for a credit card. You would need to apply to a lender, which, as noted above could be a bank, credit union or a personal lender. You will need to fill an application with your financial and personal information as well as details on the loan you want. Your lender will review the application, run a hard credit check which may temporarily lower your credit score and then decide whether to approve or not.
If your lender is satisfied with all your details and your credit score, the loan will be approved. Then your loan terms and interest rates will be set. The loan will be given to you in full and repayment begins immediately. Depending on the interest agreed, payment will the same amount every month till the payment time agreed on is complete.
As with almost anything, Personal loans have their advantages and disadvantages. To decide if Personal loans are for you, here are some factors to help with that:
Advantages Of Using A Personal Loan
No Need For Collateral Or Security
Usually, before other types of loans can be approved, collateral such as your house, car or any other valuable item would have to be pledged by the borrower to protect the interest of the lender and make sure you repay the loan. However, with Personal loans, there would be no need for collateral. If for some reason you are unable to meet up with your payment terms, you will still face serious financial consequences; but this helps because it reduces the risk of you losing your house or car to the lender.
Reasonable Borrowing Limits And Interest Rates
Personal loans borrowing limits usually range from a sum of $1,000 to $50,000. This is more than can be borrowed with a credit card loan, yet it can also be used if it’s only a small amount of loan that you require as long as your credit score is fine.
The interest rates are also really good and are lower than credit card rates. For a borrower with a great credit score, your personal loan rate can be as low as 6 to 8 percent. However, on average, the personal loan rate as of February 2021 was 11.84 present and 16.04 percent for a credit card.
Repayment Terms Are Easier To Manage
The repayment process for personal loans is very reasonable, straightforward and easy to manage. The terms can be flexible to fit your current financial situation, as opposed to something like student loans or multiple credit card loans with different payment due dates and interest rates. Personal loans just have a fixed-rate monthly payment.
Most types of loans are specific and their uses are limited. For example, student loans can only be used for tuition, auto loans can only be used for car payments and mortgages can only be used for property. Personal loans, however, can be used for almost anything from wedding funds to medical bills. There are almost no limits to the uses of a personal loan except where specifically stated by the lender.
Disadvantages Of Using A Personal Loan
Having said the advantages of a personal loan, it might still not the best option for everyone. Here are a few disadvantages to note before making a final decision.
Other types of loans usually have flexible repayment methods. For example, with credit cards loans you can take as long as you want to pay back, but with personal loans, the payment is fixed. The payments are usually monthly and are higher than the payments required for credit card loans which can be paid in small amounts.
Higher Interest Rates
As mentioned above, personal loans have lower interest rates than credit card. However, this only applies to individuals with perfect credit scores.
An alternative in this situation would be using a home equity line of credit (HELOC) or the home equity loan; if there’s enough equity in your home. The disadvantage of this is that your house is officially put up as collateral and if you miss out on any payment, you risk losing your home.
Another alternative to Personal loans is credit card balance transfer offers. These help to save money if a good offer is given, but your repayment must be completed before the special offer periods.
Prepayment Penalties And Origination Fees
With personal loans, you cannot just pay back the exact amount borrowed like it is with some other loans. Instead, you have payment penalties like interests to pay. Some lenders charge prepayment penalties if your balance is paid off before the end of your loan term. This is why it is very important that all fees and penalties are thoroughly reviewed before the agreement.
Apart from the interest, a lot of personal loans also have an ‘origination fee’ that is the cost of processing the loan. Some personal loans come with origination fees of 1 percent to 6 percent of the original cost of the loan.
In the same way credit card loans can be consolidated can personal loans, but the difference is that the cause of the debt is not addressed. People who tend to overspend might have an issue with this as it will serve to accumulate more charges as opposed to helping reduce your debt.
So! Should You Take A Personal Loan?
At the end of the day, it depends on what works for you and your financial situation at the time. Personal loans will work for you if you need money quickly for maybe more than one thing. It works because there are a lot of lenders (mostly online) and arrangements can be finalized in just a few days. They can be used to finish up rent payments, medical bills, etc. Their interest rates are pretty low once your credit score is good and repayment is made very easy.
However, just like we pointed out above, Personal loans have their downsides. It is not meant for everyone, especially overspenders. It might end up leading to a situation where you are left with more debt.
It is essential to make sure you have thoroughly done research on personal loans as well as other types of loans before coming to a conclusion. Research on alternatives such as credit card balance transfer, the HELOC and Home equity loan are encouraged. It is also very advisable for you to make out a plan on how to spend the borrowed money and the steps to pay the money back. You should think about the repayment timeline and monthly payments.
If you decide to go ahead with the personal loan, make sure to get quotes from multiple lenders for proper comparison. Pay close attention to the different loan terms, interest rates, fees and penalties.