You’ve probably heard many times that you need to “plan for the unexpected.” But for many of us, creating a rainy-day fund is never something we get around to doing. So when your car needs a new transmission or your house needs a new roof, where do you turn? That’s how you can end up with a mountain of credit card debt. One way to start digging out is by taking out a personal loan. In this blog we’ll take a look at some of the benefits of personal loans. First, an explainer on exactly what a personal loan is.
What Is a Personal Loan?
With a personal loan, a lender gives you a certain amount of money in a lump-sum payment. The borrower has to repay the loan in monthly installments, which include interest. The interest rate varies based on several factors, including the length of the loan and the borrower’s credit history.
Personal loans are one of the fastest-growing loan products. One reason for that is the declining interest rates. A 2019 study found that the average interest rate for a personal loan went down nearly 4% over the previous 20 years. In 2020, nearly one fourth of all US adults had a personal loan.
What Can I Use a Personal Loan For?
One of the benefits of personal loans is that you can use them for a variety of purposes. The most common use is to consolidate credit card debt. Credit cards tend to have very high interest rates, and when you start getting three or four (or more) credit cards, that can really add up. A personal loan allows you to consolidate that debt into one monthly payment at a lower interest rate.
Common uses for personal loans include:
- Consolidating credit card debt
- Covering major medical expenses
- Home improvement projects
- Car repairs
- Weddings or other life events
- Any other unexpected expense
We’ve covered one of the benefits of personal loans: their versatility. Here are some more:
Get a Larger Line of Credit
Most credit cards have relatively low credit limits. For example, the limit might be $1,000 for one and $5,000 for another. Here’s how they work: if you have a credit card with a $1,000 limit, once you’ve spent $1,000 you have to pay some of that money off before you can charge any more to the card. Think of a credit card as a revolving loan, where you are constantly borrowing up to the amount of the credit limit. A personal loan doesn’t come with that type of restriction. You can borrow a lot more money up front, depending on your credit history, making personal loans a much better option for a higher dollar expense.
No Collateral Required
When you get a home or auto loan, you put up that house or car as collateral. If you aren’t able to make your payments, the lender can seize those assets. You don’t have to worry about that with most personal loans. If you are getting a loan under a certain amount, they are unsecured, which means you aren’t putting any assets at risk if you default on your loan (higher loan amounts sometimes require some type of collateral, usually auto). However, just because you aren’t putting assets at risk doesn’t mean there won’t be consequences for defaulting on your loan. If your loan is considered in default (generally at least 30 days past due), it will go to collections. The lender or debt collector could take you to court to recover the payment. Your credit score could also take a big hit. One late payment can drop your score by more than 100 points.
Manage Your Payments More Efficiently
If you are one of the millions of Americans with credit card debt, it can be hard to keep track of how much you owe on each card and when each payment is due. When you consolidate your credit card debt with a personal loan, you just have one monthly payment to keep track of, and you know exactly what it takes to get that debt paid off.
Easier Approval Process
Personal loans are one of the fastest types of loans you can get. Lenders often require much less paperwork to process a personal loan versus a home loan. Most lenders will ask for a form of ID, a proof of employment (like a paystub or W-2), and a proof of address (like a utility bill). You can often get approved for a loan and get your funds in one or two business days.
Longer Period to Pay it Off
You’ve probably heard of payday loans. Payday lenders will give you cash quickly at very high interest rates, and you have to pay them back when you get your next paycheck. It’s a very expensive way to borrow money. With personal loans, you often have much lower interest rates and a longer term to pay the money back. A personal loan can be paid back over 4 or 5 years, as opposed to weeks. You can choose your loan term at the time of application.
Is a Personal Loan the Best Option for You?
Now that you know the benefits of a personal loan, it’s time to decide whether it’s the best option for you. Think about your spending needs and whether you’d be able to afford making the monthly payments on time. If you’ve decided that a personal loan is the way to go, take two minutes to check your rate on the Lend-Grow marketplace. You can see the best deal for you and be on your way to getting your loan fast.