Getting a personal loan can have a lot of advantages, especially when it’s used for the right reasons. Online applications make it easy to apply, and you can often get your money the same business day. Plus, there are several other benefits to consider.
So what is the benefit of obtaining a personal loan? Let’s take a closer look at why they may make more sense than other financial products, such as credit cards.
- Monthly payments are fixed, helping you plan your budget.
- They have lower interest rates than credit cards, potentially saving money overall.
- Personal loans come with few restrictions on how the funds can be used.
- Both secured and unsecured options are available, depending on your eligibility and preference.
What Is A Personal Loan?
A personal loan is a type of installment loan that requires you to make fixed monthly payments for a set period of time until the loan is paid in full. Personal loans typically have fixed interest rates, with loan terms between 12 and 60 months.
Unlike a credit card, you can’t borrow money more than once from the same account with a personal loan. The loan amount is typically deposited into your bank account in one lump sum. Monthly payments do not gradually restore access to the original loan amount.
Like other types of installment loans, personal loans can either be secured or unsecured. A secured personal loan requires collateral that the lender may seize if you default on the loan, which may help you get approved for a personal loan. It can also increase the amount you can borrow or lower the interest rate. An unsecured loan doesn’t require any personal collateral, but may be more difficult to qualify for.
To get a personal loan, borrowers should have a good credit score, but subprime options do exist if you have less-than-stellar credit. Most lenders have a minimum credit score requirement between 610 and 640.
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The Advantages Of A Personal Loan
There are a number of personal loan benefits. Here are a few you may want to consider when deciding your next financial steps.
- Fixed And Predictable Payments
Unlike the monthly payments on a credit card you’re actively using, the monthly payments on a personal loan do not change. You know exactly how much you need to pay every month until it’s fully paid off. If you’re juggling a lot financially, having a predictable payment makes budgeting much easier.
- Lump-Sum Disbursement
With a personal loan, borrowers typically get the entire loan amount deposited in their bank account at one time. So instead of having to repeatedly borrow smaller amounts, borrowers receive the entire loan amount all at once. This makes personal loans ideal for large projects and expenses, such as a home renovation, a major medical bill or high-interest debt consolidation.
- Versatile Uses
A car loan, student loan and home mortgage all only have single-use applications. A personal loan, on the other hand, is more flexible in how you can use the funds.
For example, personal loans can be used for:
- Emergency car repairs
- Medical bills
- Home renovations
- Debt consolidation
- A wedding
- Moving
Lenders typically prohibit you from using the funds for:
- Buying a car
- College tuition
- A down payment on a home
- Gambling
- Investing
- Starting a business
- No Collateral Required
While you can get a secured personal loan, collateralizing an asset is not necessary to take out a personal loan. Many personal loans are unsecured. For many borrowers, this is a major perk because it means they don’t have to put any of their assets at risk.
Two drawbacks of unsecured personal loans, though, are that they can be harder to qualify for and come with higher interest rates since the lender is taking on more of a risk. Another downside is that the amount a lender is willing to loan for unsecured loans is lower than it would for a secured loan.
- Fast Turnaround
Many online lenders have automated a lot of the application and approval process. Because of this, it takes only a few minutes to apply and get approved with some lenders. Funding time can take anywhere between the same day and a week, depending on your financial institution.
If you’re in a time crunch and need the money for an emergency expense, a personal loan may be the best route to take.
- Better APR When Compared To Credit Cards For Many Borrowers
If you have a strong credit score, taking out a personal loan should save you money in interest compared to a standard APR credit card.
The average credit card interest rate for people with a 620 – 719 credit score is around 28% from large credit card companies, according to the Consumer Financial Protection Bureau (CFPB). The average interest rate on a personal loan from a commercial bank is 11% – 12% for a 24-month loan, per Federal Reserve data.
7. May Help Improve Your Credit Score Over Time
Your credit mix makes up 10% of your credit score. If you don’t have any installment loans on your credit report, then getting a personal loan could help improve your score.
If you use a personal loan to consolidate your debt and pay off your credit cards, then your credit utilization ratio will improve over the long run. However, your payment history accounts for 35% of your FICO score, so make sure to pay all of your bills on time.
8. Can Help Consolidate High-Interest Debt
A personal loan may enable you to combine all of your debts into one monthly payment. Medical debt and credit card debt could potentially be paid off with a single personal loan. By shopping around, you may even be able to come out ahead with a lower interest rate.
While not as noteworthy as saving money in interest, consolidating debt with a personal loan means you have only one payment a month to worry about.
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When Does A Personal Loan Make The Most Sense?
A personal loan makes the most sense when comparing its costs to a credit card. While you may have higher monthly loan payments than a credit card minimum payment, you’ll likely save more money in interest over time.
And there’s the added benefit of getting all of the money you need in one lump sum. Fixed monthly payments with a lower interest rate could make financial sense when you consider the long-term costs of borrowing.
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What Are The Risks Of Taking Out A Personal Loan?
Taking out a personal loan isn’t always the best move for all situations. For example, if you choose a longer loan term, you may end up paying more in interest than you would have making larger payments on a credit card. So it may be a good idea to use an online payoff calculator and compare the results.
It’s also important to compare personal loan fees with those of other products. Common fees include:
- Origination fee: Range from 1% to 10% of the loan amount.
- Late fees: Could be charged as a flat fee or a percentage of the amount owed.
- Prepayment fee: Usually charged as a percentage of your remaining balance, up to 2%.
What About Fast Cash Loans?
Fast-cash loans such as payday loans have unusually high interest rates, and the borrowers who use them often find themselves in debt cycles. Fees can cost between $10 and $30 for every $100 you borrow. Online personal loans may be just as fast these days as payday loans, but they aren’t the same. Before taking out any loan, always compare the loan terms to those of other loans you qualify for. The fastest loan on the market may or may not be the right one for you.
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How To Decide If It’s Right For You
Before deciding whether you should take out a personal loan, ask yourself these questions:
- Will the personal loan help with a financial problem?
- Could I afford the monthly payments for multiple years?
- Is the expense a need or a want?
- How much will the total cost of the loan be once it is paid off?
- Will this loan help improve my finances in any way?
Before you take out a personal loan, make sure you can answer the above questions and understand the consequences and benefits of what a personal loan would look like in your life.
FAQ
The Bottom Line: Personal Loan Benefits Make It Worth It For Large Expenses
For many borrowers, a personal loan is the better option for a large expense because it saves money in interest and you can access the funds in one lump sum relatively fast. Make sure you weigh all the fees and compare it to other financing options before committing to a new loan for several years.
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Lauren Ward
Lauren Ward is a writer with over a decade of experience covering financial topics for businesses and publications. Her work has also been featured in major publications such as U.S. News and World Report, CNN, Business Insider, The New York Post and Bankrate. Her expertise includes real estate, mortgages, small business, insurance and more.
