Is Having a Personal Loan a Good Idea?
Understanding personal loans.
When you hear the words ‘personal loan’ you may think that they are bad. However, they are not always bad.
A personal loan is money borrowed from a lender that you pay back with equal monthly payments, or installments over a fixed period, typically lasting for two to seven years. You can get personal loans from banks, credit unions, and online lenders, such as Credit Ninja.
In return for this, you will pay interest on the loan, which can range from a simple 6% to 36%, if you have a good credit rating, generally over 690, you will typically be able to qualify for the lower end of the credit range.
The pros of personal loans.
There are plenty of good things that can come from personal loans. Some loans may only be usable for certain purposes. For example, if you were to take out a car loan, the only way you can use this is for a vehicle. Personal loans can also be used for many purposes, from consolidating debt to paying off medical bills, there is a whole range of options.
It is basically a way that you can finance a major purchase without being told specifically how you can use the money.
These can also offer lower interest rates than credit cards. In 2021 the average personal loan was 11.84 percent interest, whereas the average for credit cards was 16.04 percent interest. If you have excellent credit, then you can also get a lower rate than this.
Unsecured personal loans also do not require collateral for you to get approved. This means there is no putting your car, home, or anything else up as a guarantee. Personal loans are also easier to manage. One reason some will take out these loans is to consolidate debt, such as multiple credit card accounts. A personal loan, with a single, fixed-rate monthly payment, is much earlier to manage with several credit cards with different interest rates.
The cons of personal loans.
It is not all sunshine and rainbows though, it does have its downsides. If you have a poor credit score, then you can expect to pay a high interest rate, perhaps higher than you would if you applied for a credit card.
This also means that fees and penalties can be high, and they can drive up the cost of borrowing. The payments will also be higher than credit cards as well, often with a fixed monthly payment that has to be paid off by the end of the loan term.
Similarly, if you are not careful, then they can end up increasing your debt. When you pay off your credit cards with a personal loan, it does free up your available credit limit. For over spenders this can offer an opportunity to rack up even more charges, rather than freeing oneself from debt.
When is having a personal loan a bad idea?
It is not always wise to get a personal loan. It could be a bad idea in a few instances, for example if it is a no-credit-check loan, lenders that do not check your credit cannot accurately assess your ability to afford this loan, thus meaning more risk for them and higher rates for you.
If managing debt is a challenge for you, then it may not be a good idea either. A debt consolidation loan can actually end up increasing the burden of your debt. Requiring you to use the loan to pay off your other debts and avoiding taking on more. The best way to avoid debt is to simply follow a budget instead.
There are also much cheaper alternatives to borrowing. If your credit score is good, you could even qualify for a 0% interest credit card. Why go for a personal loan when you could do this instead?
When should I get a personal loan?
Personal loans can also be a good idea when you use them to gain financially, such as paying off debt through consolidation, or renovating your home to boost its value.
It can also make sense to use a personal loan for large purchases that you do not wish to put on a credit card. Many experts in finances will recommend against using a personal loan for discretionary reasons, such as weddings, trips abroad, and so on. Simply because borrowing can be expensive, and you could still be paying off these for years after they have happened.
Saving is a much better way to afford the more pricey items. But if you do decide to borrow, and you feel that you have a stable enough income to support a few years of monthly payments, then a personal loan can be much cheaper than most credit card options.
How much do they cost?
The cost of a personal loan is very dependent on your credit score. Lenders of personal loans typically advertise APRS from 4.99% to more than 20%. And the better that your credit score is, the more likely you are to get a lower rate of APR.
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