You might borrow money from a close friend or relative, take it out of your retirement account, or dive into your savings. Getting a personal loan is another popular method of obtaining additional funds. This loan can be used for various needs, from debt consolidation to wedding financing.
Although personal loans are very common, many people are still not familiar with all their ins and outs. So, what is the benefit of obtaining a personal loan? And are there some considerations regarding them? Let’s find out.
What Is a Personal Loan?
A personal loan is a lump sum deposit a borrower gets into their bank account from a bank, credit union, or online lender. Then, the money recipient needs to repay it with interest in affordable monthly payments, usually within up to 60 months.
Most personal loans are unsecured, which means you can apply for one without putting up any security. Furthermore, these loans rank among the least expensive solutions available without a set objective. To get personal loan funds at a reasonable interest rate, you must, however, have a strong credit score.
How Much Can You Borrow with a Personal Loan?
The typical personal loan amount is between $2,000 and $50,000. The exact sum an applicant can get depends on their solvency and creditworthiness, as well as the state of residency and the limitations set by the specific lender. Whether you are requesting a $20,000 or $5,000 personal loan, lenders want to know they will get their money back. Thus, loan providers base their maximum loan amount calculations on the applicant’s income, credit history, and debt-to-income ratio.
Personal Loans: Pros and Cons
Knowing the major personal loans pros and cons can contribute to your pleasant borrowing experience. Learn them carefully to make the right financial decision and avoid abruptness.
Advantages of Loans for Personal Needs
The key advantages of loans for personal needs include the following:
No Specific Loan Purpose
A personal loan lender doesn’t restrict you in the way you can use the loan proceeds. Thus, you can apply for a loan even if you don’t know yet what you’re going to spend the money on. It may be quite convenient if you need money for wedding or vacation expenditures and can’t say what expense category will be covered with the borrowed amount ahead of time. Other popular personal loan uses include debt consolidation, home renovation, medical expenses, college tuition costs, and much more.
Flexibility
Personal loans can be repaid within 12 to 60 months. Feel free to choose the loan term that fits your budget. Your monthly payment will be less the longer your payback time is. Conversely, a shorter loan term will save you a lot of money on interest while also resulting in a larger payment. You can use a simple loan calculator to identify the optimal loan duration and monthly payment.
Predictability
When it comes to personal loans, there’s nothing that comes as a surprise. This form of borrowing usually has fixed monthly payment amounts and interest rates. This means that the sum you pay will be the same within the whole loan life. With a predictable monthly payment, it becomes much easier for you to plan your budget.
One Lump Sum Payment
A personal loan lender will transfer the entire loan amount to your bank account in one lump sum. Thus, it becomes more convenient to finance a major purchase, cover unexpected expenses, or pay for vacation compared to a credit card or line of credit. The borrowed amount then needs to be repaid in equal monthly payments, so personal loans don’t put much stress on your budget.
Credit-building Options
If you’re looking for an option that will stimulate your credit score growth, a personal loan is one of them. All you need to succeed is to make consistent on-time payments. Each time you stick to your repayment schedule, a lender reports it to three major credit bureaus. This demonstrates your responsible financial behaviour. Your credit score boosts over time, increasing your chances of getting favourable interest rates on financial products in the future.
Affordable Interest Rates
Personal loan rates are typically lower than those for credit cards or short-term loans. You can get between 5.99% and 35.99%, depending on your credit score, state, loan type, and the particular lender. As of October 2023, the average personal loan rate is 11.47%. For comparison, the same figure for credit cards is 28.17%. Reduced borrowing costs allow you to save money in the long run by paying less in interest to a lender.
Higher Loan Amounts
Lenders offering personal loans usually set a higher borrowing limit compared to regular credit lines or cash advance loans. You can typically get from $2,000 to $50,000, with some options reaching $100,000. The exact maximum sum depends on your gross monthly income, credit score, and debt-to-income ratio.
Fast Funding Times (For Some)
As the lending market evolves, some personal loan companies can provide you with money in as little as one business day. Thus, a personal loan can be a great emergency solution if you deal with the right moneylender.
No Collateral Needed
In most cases, personal loans don’t require collateral. This makes them safer for a borrower. Even if your financial situation changes, adding some difficulties to making your loan payments on time, you don’t put any of your assets at risk.
Some Disadvantages of Personal Loans
While personal loans can be a great ally in reaching your financial goals, there are some considerations regarding them, too. First of all, personal loans usually have strict credit score requirements. Traditional lenders are more likely to offer lower interest rates to borrowers with good and excellent credit. Otherwise, you can get an interest rate of as high as 35.99% or even be denied a loan.
Also, personal loans often come with extra charges that can potentially affect their total costs. The most typical ones include late fees, prepayment penalties, and origination fees. Your loan agreement must include a detailed explanation of all rates and costs, so you should carefully read it before signing. Take extra care to read the fine print and confirm that you know exactly what you can be charged for.
Additionally, personal loans carry potential risks to your credit history. Although they can help you build credit, things can get worse, too, if you pay late or miss your payments. On top of that, personal loan lenders commonly make hard credit inquiries to evaluate your creditworthiness. Therefore, your credit score will temporarily go down by a few points after you apply for one.
Best Alternatives to Personal Loans
There’s no single answer, as you’re the only one who can decide what option will be the best for you. The right choice depends on your particular circumstances, credit score, and current preferences. If you’re looking for an alternative to an unsecured personal loan, options like credit cards, peer-to-peer loans, 401(k) loans, and borrowing from your family can fit.
Opting for a lower interest rate or having a bad credit score? Consider secured personal loan alternatives. The most common ones include home equity loans, home equity lines of credit, and cash-out mortgage refinancing. But be cautious before obtaining a secured loan. Although with, say, a home equity loan, you can qualify for a higher loan amount at a lower rate, it also comes with the risk of losing your property.
Note:Â Try to avoid short-term, high-interest debt. Options like payday loans or auto title loans can be tempting due to their accessibility but should only be used as a last resort in case of small emergencies.
When Getting a Personal Loan Is a Good Idea?
Personal loans can be a perfect fit if you need to get a high amount on hand without bothering your savings account balance. It can also help you finance large purchases or obtain something that you need right away without setting the money aside. Finally, getting a personal loan can be a great idea if you want to cover other costly debts and reduce the financial burden you carry.
However, it’s crucial to make sure you can afford this potential debt before obtaining it. Here are some questions to ask to figure out whether a personal loan is the right option for you:
- What is my credit score? The best offers are usually given to borrowers with higher credit.
- Can I stick to my loan payment schedule? Make sure you can cover your debt payment obligations without delays in advance.
- Will I have enough money left for my current needs after making the monthly loan payment? Pay attention to the amount that will remain after you make your loan payment, and make sure it corresponds with your regular monthly expenses.
- Are there cheaper alternatives available? Shop around for other options and compare various offers to choose the one with the best rates and terms.
Final Thoughts – What Is The Major Personal Loan Benefit
A personal loan can help you get the funds you need relatively quickly and use them on any needs and goals. Although there are many benefits of loan options for personal needs, the major one lies in their affordability. It becomes possible due to their lower interest rates and flexible repayment terms that each borrower can adjust to their particular situation.
However, a personal loan is still the amount you borrow and need to repay on schedule. Additionally, you will be required to meet the lender’s minimum credit score requirements to qualify or get favourable loan conditions. Therefore, you need to approach it responsibly and weigh all the pros and cons before going into debt.
