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Should You Get a Personal Loan?

If you want to consolidate high-interest debt or finance a significant expense like a home improvement project, a personal loan is an opportunity.

Personal loans have lower interest rates than credit cards for borrowers with good credit and are generally unsecured.

In this post, we’ll discuss when it might make sense to get a personal loan, the pros, and cons, and how to compare offers to find the best deal.

What Is a Personal Loan?

Personal loans are a sort of credit that people obtain for a variety of reasons.

Personal loans, unlike mortgages and auto loans, are not intended for a specific purpose.

Personal loans are installment loans, which means that if you’re approved, you’ll get a lump sum of money that you’ll pay back in predetermined monthly payments until the loan period ends.

A lender will evaluate your credit and income to see if you qualify for a personal loan and determine your ability to repay it.

Personal loans typically require a credit score of 610 to 640. The lowest rates are normally given to borrowers with the best credit ratings.

Pros and Cons of a Personal Loan

There are several advantages to borrowing money via a personal loan. The following are some of the benefits of a personal loan:

1. Interest Rates are Lower and Borrowing Amounts are Higher

The interest rates on credit cards are typically greater than those on personal loans.

The average personal loan rate was 10.46% in September 2021, while the average credit card rate was 16.27%.

Personal loans with rates ranging from 6% to 8% are available to consumers with outstanding credit histories.

2. No Need for Collateral

You can get accepted for an unsecured personal loan without putting up any collateral.

An advantage of a personal loan is that you won’t need to put up your vehicle, house, or other valuable property as collateral.

If you can’t pay back your personal loan on the agreed-upon terms, you’ll face significant financial consequences.

You won’t lose your house or car as a consequence, but you will suffer serious financial repercussions.

3. Flexibility and Adaptability

Some loans are restricted to a single-use.

You may only spend the funds on a car, for example, if you take out an auto loan. Personal loans can be used for a variety of things, including debt consolidation and medical costs.

A personal loan can be suitable if you need to finance a large purchase but don’t want to be restricted in how you utilize the funds.

Double-check the accepted purposes of your loan with your lender before applying.

More: 5 Reasons Why Your Personal Loan Was Rejected And How To Recover

4. Simpler to Handle

Personal loans are used by some people to consolidate debt, such as multiple credit card accounts.

Personal loans with a single, predetermined monthly payment are simpler to handle than many credit cards with various interest rates and due dates.

Borrowers with a personal loan with a lower interest rate than their credit cards may consolidate their bills and save money.

The following are the disadvantages of a personal loan:

1. Loan Fees and Penalties

Personal loans may be accompanied by fees and penalties that increase the borrowing cost.

Origination fees for some loans range from 1% to 6% of the loan amount.

Fees for loan processing might be rolled into the loan or deducted from the total amount disbursed to the borrower.

If you pay off your loan debt before the end of the term, some lenders levy prepayment penalties.

Examine all costs and penalties associated with any personal loans you’re considering before applying.

2. Sometimes Payments are Higher Than With Credit Cards

Credit cards have low monthly minimum payments and no deadline for paying off the balance in full.

Fixed monthly payments are common for unsecured personal loans, but they must be repaid after the term has elapsed.

You must adjust to the higher payments and the loan payoff timeline if you consolidate credit card debt into a personal loan, or you risk defaulting.

3. Rates of Interest May Be Greater Than Other Options

Not all personal loans have the lowest interest rates.

Borrowers with terrible credit, for example, might be charged higher interest rates than those charged by credit cards.

You may borrow against the equity in your house using a home equity loan or a home equity line of credit (HELOC).

A HELOC is similar to a credit card, but a home equity loan is an installment loan.

4. Personal Loans Have the Potential to Raise Debt

Personal loans can be used to consolidate debt, such as credit card bills, but they do not solve the problem.

When you use a personal loan to pay off your credit cards, your available credit limit rises.

This provides an opportunity for overspenders to rack up more charges rather than pay off their debt.

When Should I Get a Personal Loan?

When a personal loan is less expensive than other forms of credit and you can comfortably handle the monthly payments over the life of the loan, it can make sense.

Some of the most popular reasons for taking out a personal loan are:

  • Using a personal loan to consolidate debt: The interest rate on a consolidated loan may be lower than the rates on all of your other loans, this is a good idea. A personal loan might assist you in consolidating several types of debt.
  • Personal loan for an unexpected expense: Applying for a personal loan is simple, and no collateral or security is required.
  • Vacation personal loan: A personal loan may help you pay for a once-in-a-lifetime European vacation or a family trip to Disney World, but creating and sticking to a budget while drawing money from your checking or savings account is usually the best option.
  • Personal financing for a large buy: This is just a large purchase that you’ve made due to your own choices.
  • Personal loan for home improvements: A home loan could be a great option for little or medium-sized projects like new windows or a room makeover. Your financial stability and track record are the most important factors to consider when determining whether or not to take a personal loan.

Best Personal Loan Lenders In 2022

APR: 5.99% to 35.99%. Loan Amount: $1,000 to $35,000.

5

Financeive Rate
Interest Rates
4.9/5
Loan Amounts
5/5
Customer Experience
5/5
Availability
5/5
Approval Rate
4.7/5
APR Range: 5.99% – 24.99%. Loan Amount: $5,000 to $40,000

4

Financeive Rate
Interest Rates
5/5
Loan Amounts
5/5
Customer Experience
4/5
Availability
4.5/5
Approval Rate
4,2/5
APR: 59% to 160%. Loan terms: 6 to 18 months

4.8

Top Choice
Interest Rates
3.5/5
Loan Amounts
4.6/5
Customer Experience
5/5
Availability
5/5
Approval Rate
5/5
APR: Not specified. Up to $25,000 Unsecured Personal Loan.

4.5

Financeive Rate
Interest Rates
4.5/5
Loan Amounts
5/5
Customer Experience
4.3/5
Availability
5/5
Approval Rate
5/5
APR: 7.99% – 35.99%. Loan Terms: 6 – 24 months. Loan Amounts $1,000 – $35,000.

4

Financeive Rate
Interest Rates
4/5
Loan Amounts
5/5
Customer Experience
5/5
Availability
3.5/5
Approval Rate
4/5

How To Get a Personal Loan

Checking your credit score before applying for a personal loan allows you to examine your creditworthiness and correct any inaccuracies.

Calculate anticipated rates after determining how much you need to borrow.

In this calculator, you can learn what you need to pre-qualify and compare rates from online lenders, banks, and credit unions.

Then look at other credit choices such as 0% interest credit cards, secured loans, or a co-signer.

Read the fine print before committing to a financing option to check if there are any costs and to learn more about the benefits they offer, such as direct payment to creditors or variable payment schedules.

If you decide to proceed, gather the necessary papers and submit a formal loan application.

You may also like: Using a Personal Loan to Invest: Is It Make sense?

How to Compare Personal Loans

Finding the appropriate loan for you isn’t always as straightforward as it appears, because there’s a lot to consider when choosing a lender.

Here is the step-by-step brief:

Step 1: Obtain Quotations from 3 or More Lenders

Interest rates, repayment schedules, fees, and the time it takes to finance loans can all differ significantly from one lender to the next, so getting multiple quotations is critical when shopping for a loan.

To avoid missing out on a better loan offer, seek quotes from at least three lenders, preferably more if possible.

Step 2: Look for lenders who will let you compare loan offers without running your credit

Deal with personal loan providers that provide easy comparison shopping and simple inquiries to safeguard your credit score while getting the best financing offer.

Step 3: Examine the Total Costs

When comparing rates, compare the annual percentage rate (APR) rather than the interest rate.

The APR takes into account any fees to show you the total cost of borrowing money over a year.

Frequently Asked Questions