Personal loans are one of the ways to reach your financial goals. Whether you need money for a dream vacation or home renovation, they can get you covered. More than that, personal loans usually offer multiple benefits. You should only pick them wisely and use them with caution. Here’s a look at potential advantages of taking out a personal loan.
Borrowing money makes sense in some situations. It also brings several advantages if you approach this process responsibly. You can review and compare multiple loan offers via the BadCredify finance portal or do your own research before choosing a particular option. The main condition that must be met to benefit from a personal loan is to make sure you deal with a reputable lender and get reasonable loan terms. Once true, you can explore the following key merits of having a personal loan.
There is no need to save money before buying something or covering unexpected expenses. Instead, you can use a personal loan. It will be given to you in full in cash or transferred into your bank account via a direct deposit. You can also use it as an alternative to your reserve emergency savings or retirement funds, helping you avoid tax penalties or early withdrawal fees.
Personal loans usually don’t put much stress on your budget due to their flexible repayment schedule. Commonly, the loan life is between one and five years. Your overall loan cost will be divided equally by the number of months of your repayment terms. Thus, you will pay off the debt in a series of affordable installments.
Personal loans come with a wide array of available amounts, typically ranging from $1,000 to $50,000 or even $100,000. Thus, loan maximums are much higher than those offered by credit card issuers or other consumer loan providers. The major factors that determine the exact sum you can borrow are your income and the repayment period.
Personal loan rates are usually between 5.99% and 35.99%. The better your credit score, the lower the rate a lender can offer to you. Speaking about the averages, they are much lower compared to credit card debt. According to the Federal Reserve data, the average personal loan rate for applicants with good credit was about 12.17% as of Q3 2023. Credit card borrowers in good standing were offered APRs of 21.19%.
Most personal loans are unsecured loans that only use your signature as a repayment guarantee. This means that you don’t risk losing your assets, even if you default on your loan. It also speeds up the entire process as you don’t need to waste time on property appraisals and gather additional documents.
Personal loans are great credit-building options if approached responsibly and repaid on time. When you take out a loan from a lender that reports your loan balance transactions to major credit bureaus, each of your on-time monthly payments creates a positive history of credit records.
Personal loans can be spent on various individual needs. Although some lenders may restrict loan uses, these limits usually relate to investment, down payments for a mortgage, education-related costs, and business financing. Feel free to take out a personal loan to consolidate debt, cover medical expenses, pay for a wedding or vacation, renovate a house, or overcome financial emergencies of various kinds.
Personal loans generally come with fixed interest rates that don’t change over the loan life. This, in addition to a clear repayment schedule, makes them predictable. Your monthly payment amount will be the same during the entire repayment period, making budgeting and money management much easier.
Despite the fact that personal loans have many advantages, they also come with some downsides that can affect your overall borrowing experience. Here’s a look at the main personal loan drawbacks.
Not all personal loans come with reasonable interest rates. They can be quite costly sometimes. Personal loan lenders pay special attention to a borrower’s credit rating. As it represents your financial behavior and can directly affect your potential loan terms, you need to have a strong credit score to get a low interest rate on your loan.
Each time you take on debt, you add more stress to your budget due to the loan payments it comes with. Therefore, you need to have a solid plan of how to handle it. Make sure the purchase you’re about to make is worth the months or even years of repayment. Do all the necessary calculations and make sure your overall monthly financial obligations are affordable and don’t compromise your regular living expenses.
A debt-to-income ratio is a parameter that shows whether you’re in good financial shape. It’s calculated by dividing all your monthly loan payments by your monthly gross income. It’s recommended to keep your DTI around 35%-40% to maintain financial health. Taking out a new personal loan will increase the ratio. This means that it will be more difficult for you to get a loan from a bank or credit union until you pay off the current loan.
Everything starts with a personal loan application. Traditional lenders typically make hard credit history checks to estimate your creditworthiness and make an approval decision. Such an inquiry entails a small credit score drop by about 10 points. It’s a temporary drop that will level off over some time, provided that you make your monthly payments on schedule.
However, if you miss your payment or make it late, a lender will report it to major credit bureaus. This may result in a dramatic credit score drop that will be difficult to fix. Additionally, it will negatively affect the potential loan terms you may be offered in the future.
Personal loans can be a smart financial solution if chosen and used wisely. Here are a few questions to ask yourself before taking one out:
- Is it what I really need? Make sure obtaining a loan is an extreme need that you can’t do without. Be realistic about your loan reason and ask yourself whether it’s a good one. Maybe you need a vacation you can’t delay anymore or face an emergency that requires a quick fix.
- Can I afford the loan payment? Use a personal loan calculator to ensure your monthly loan payments are within your means. Only borrow when you can pay without sacrificing your regular needs and expenses.
- Are there cheaper options? If you can turn to savings to avoid interest or borrow money from loved ones, it may be a smarter alternative.
- Do I have a high enough credit score? If your credit is strong, you can make the most out of your personal loan. Otherwise, you may face higher borrowing costs.
Pay attention to the following factors when choosing a personal loan:
- Interest rates and fees (the lower, the better);
- Repayment term flexibility;
- Suitable loan amounts;
- Eligibility requirements.
Review lenders thoroughly and read customer reviews to make sure you’re going to deal with a reputable and reliable loan provider. It’s also recommended to pre-qualify for a personal loan from several lenders before settling on one. This way, you will be able to compare their offers and ensure you choose the best possible option.
If a personal loan seems like a bad idea for you, here are some available alternatives.
A 0% APR credit card provides access to a revolving line of credit. The main difference from a regular card is that a cardholder won’t be charged interest during the promotional period. If you pay the balance before the end of the term, your loan will not accrue extra costs.
A home equity loan is a secured loan for current homeowners. A borrower has to put up their equity in a house as collateral to access the funds. Compared to an unsecured personal loan, a home equity loan allows you to borrow a higher amount at a lower interest rate. However, it’s also riskier as your house can be foreclosed if you default.
Peer-to-peer lending can be a good alternative to predatory payday loans for people who don’t have a strong credit history. These loans are available via specific platforms where individuals borrow money from each other, bypassing financial institutions. Such loans come with no hard credit checks but can be more expensive.
Family loans can be a great way to take out a few hundred dollars till paycheck or find emergency cash. By asking your loved ones for help, you can get interest-free financing at more favorable terms that take into account your specific situation.