What Is a Personal Loan?
Personal loans are a lump-sum of money a bank, credit union, or online lender lends to a borrower, who will repay the loan in fixed installments for a predetermined amount of time. These payments include interest and any applicable fees. Borrowers can choose from either secured or unsecured loans. The former requires the borrower to put up collateral to guarantee the loan, whereas the latter doesn’t. Personal loans are also known for their flexibility in that borrowers can use the funds for almost any purpose.10 Benefits of a Personal Loan
If you’re wondering what is a benefit of obtaining a personal loan, the answer is that there are many. Some personal loan pros include its flexibility, higher borrowing limit, and predictable repayment schedule.1. Higher Borrowing Limit Than Other Debt
A popular alternative to personal loans are credit cards, but you may not be able to borrow a large sum. You may be better off with a personal loan if you’re looking to borrow at least $10,000. For instance, SoFi personal loans allow you to borrow up to $100,000.2. Lower Interest Rates Than Credit Cards
Interest rates for personal loans are usually lower compared to what you’d find for credit cards. For those with good credit scores, personal loan rates start at around 5%. Even those with fair credit scores may not be charged rates in the double digits. Compare personal loan rates to credit cards, which often charge much higher rates. If you carry a balance on your cards, the interest adds up.3. Collateral Is Not Typically Required
Borrowers who take out unsecured personal loans don’t need to put up collateral to borrow money. While defaulting on your loan can have adverse consequences, you won’t lose any assets or property like you would with a secured loan.Read more The 5 Credit Card Benefits You Should Consider for Your Next Card
4. Easy To Track and Manage
Taking out a single personal loan is simpler than cobbling together a larger loan by using multiple credit cards. Multiple loans tend to come with different payment due dates, lender policies, and interest rates. It’s far easier to take out a lump sum and make one payment using one lender.5. Predictable Repayment Schedule
Since personal loans are installment loans, they come with fixed repayment terms. That means you’ll know for how long you’ll need to make payments. For fixed-rate personal loans, your rate will remain the same and you’ll know exactly how much you’ll pay in interest throughout the lifetime of your loan.6. Repayment Term Longer Compared to Other Loans
Personal loans offer a wide range of repayment terms, from a few months to a few years. You may be able to find unsecured personal loans offering longer terms, possibly up to seven years. Compare this to payday loans that have much shorter terms and exponentially higher interest rates.7. Building Credit History
Any time you take out a loan, you’re building your credit history. Personal loan lenders report your payment activity to major credit bureaus — either Experian, Equifax, TransUnion, or all three. Making on-time payments consistently helps to build a strong credit history and boosts your credit score. However, missing a payment will also be reported, potentially impacting your score negatively.8. Ease in Applying
Filling out an application form for a personal loan is relatively simple compared to other types of loans like a mortgage, home equity loan, or a home equity line of credit. Plus, there are plenty of online personal loan lenders that use an application process that’s completely online.9. Fixed Interest Rates
Unless you decide to go with a variable rate loan, most personal loans have fixed interest rates. This is beneficial because you know exactly how much you’ll be changed in interest for the lifetime of your loan — no surprises there.10. Personal Loans Can Be Used For Many Purposes
While all of the above points are good reasons for personal loans, perhaps the main one is that you can use a personal loan for most purposes. Some common uses include major purchases and debt consolidation.- Refinancing existing debt. Many borrowers take out debt consolidation loans to simplify their loan payments, ideally at a lower interest rate. The single loan is taken out to pay off existing debts and the borrower is left with paying back a single loan. Ideally, this personal loan will also have a lower monthly payment compared to the combined total of the debts you want to consolidate.
- Making major one-off purchases. A personal loan can be an option to pay for large purchases such as a home renovation project. It tends to be a better option compared to other alternatives, especially if you have a high credit score (which can qualify you for lower rates) or you need to borrow more than your credit card limit.
- Vehicle. Auto loans are a common type of secured personal loan, where your car is the collateral, and might be a better bet if you’re purchasing a car from a dealership — you could get a lower rate.
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However, if you’re purchasing a car directly from the previous owner, an unsecured personal loan may be a good option, since lenders may not fund a private-party transaction directly. You can take your loan proceeds to pay for the car in cash and make monthly payments to your lender.- Home improvements. Funding large home improvement projects using a personal loan can be a good idea, especially if completing renovations helps you to increase the value of your home. Plus, it could be an alternative if you don’t have enough equity in your home to take out a home equity loan or home equity line of credit.
- Vacation. Using a personal loan to pay for a vacation might be helpful if you want to make sure you don't mindlessly spend (like you might using credit cards). Getting a lump sum payment can help you prepay for certain expenses such as hotels, attractions, meals, and souvenirs.
- To buy land. Many lenders offer personal loans for land purchases. There may be requirements such as restrictions on the planned use of the land that you finance. Some lenders even offer land loans to help you with land improvements, preparation, and home construction.
- Wedding. Weddings can cost a pretty penny, and this major life event can take months of preparation. For instance, you may need to make multiple deposits months or a year in advance to secure your catering and venue. If you’re considering taking out a personal loan, try to come up with a realistic budget and get a loan amount for that size.
- Major emergency expense. Life happens. Even with the best of intentions (and a rock-solid budget), you could face a huge financial obstacle, like an unexpected medical bill. In this case, you might consider taking out a personal loan and stretching out your payments so you can afford it much easier than you would if you had to pay a lump sum.
- Financing some types of training. Though you can’t usually use a personal loan to fund a college education (there are student loans for that), you can use personal loan funds for career development purposes. For instance, you may be able to borrow money to get a commercial driving license (CDL), certificate programs, and professional development courses.
Personal Loan Alternatives
If you can’t qualify for a personal loan or don’t need to borrow a large sum of money, there are some alternatives to consider.Read more 6 benefits of using a Mobile Banking App
