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Key Takeaways
- Securing a personal loan requires stable employment, steady income, and good credit.
- Finding the best deal likely involves shopping your rate with multiple lenders like you would for a mortgage.
- Personal loans are typically unsecured, allowing for higher approval and funding speeds.
See if you qualify for a personal loan. Start here
Should you get a personal loan?
In two words: it depends.
Personal loans can help you in a financial emergency or consolidate your debt, usually at lower rates than credit cards. Although, they may carry high lender fees and shorter repayment terms than you’re comfortable with.
Whether a personal loan is right for you boils down to your individual situation and goals for the money.
Personal loan pros
Personal loans bring many advantages for borrowers who need money quickly under reasonable terms.
Money upfront and fast
Once approved, you get your money upfront in a lump sum. And that can be signed, sealed, and delivered to your bank account in as little as one business day.
Comparatively low interest rates
Personal loans almost always have lower interest rates compared to credit cards.
The better your credit score, the lower your interest rates and higher your lending limits will be. For a personal loan, that could mean locking in a single-digit rate. Lower interest rates equate to paying less over the lifetime of the loan.
See if you qualify for a personal loan. Start here
Stable payment structure
Personal loans allow you to borrow money with terms from one to seven years, and you pay it back in equal installments, usually on a monthly basis. This uniform structure allows borrowers to have something steady to budget around rather than a variable.
Security in an unsecured loan
The majority of personal loans classify as “unsecured,” meaning, they’re not secured by the collateral of your property. An inability to make your payments will hurt your credit score, but you won’t risk losing your house or car.
Being an unsecured loan shortens approval time since the lenders don’t need to appraise the value of your collateral. Your approval hinges on you have stable employment, regular income, and credit score.
Credit boost
Using your personal loan for debt consolidation can potentially raise your credit score. A borrower consolidating their debt will use their personal loan funding to pay off their credit card at a lower interest rate. Getting your credit card debt squared away lowers your utilization ratio and buoys your credit score.
Flexible funds
Personal loans typically don’t come with restrictions and the money can be used how you choose. Many borrowers will use their funds for consolidating debts, home improvement, or a milestone life event like a wedding. Some exceptions, like investing or paying college tuition, do exist.
See if you qualify for a personal loan. Start here
Personal loan cons
Just like any type of lending product, personal loans have their drawbacks.
Raising your debt
Taking on a bigger debt load raises your debt-to-income (DTI) ratio. Higher DTI ratios can potentially limit how much money you can borrow and at what interest rate.
Costly fees and possible penalties
Lender origination fees on personal loans are drawn from the total loan amount and typically range between 1% to 12%. That’s something you need to account for when calculating how much you want to borrow.
It’s also important to know your loan terms in order to avoid any potential penalties. Some lenders will penalize you for paying off your loan early.
Hard credit pulls
Applying for a personal loan triggers a hard credit inquiry. Pulling those inquiries lowers your credit score in the short-term, impairing your financial profile. For this reason, you should shop multiple lenders to leverage the best rate and terms so you can minimized the hard credit pulls.
See if you qualify for a personal loan. Start here
Stringent schedules
Although a fixed, scheduled repayment amount can be advantageous, it also lacks flexibility. Credit cards do offer minimum payment options that can help you make ends meet elsewhere if needed. If you’re unsure you can consistently make your fixed payments, another type of loan, like a HELOC, could be a better option.
Static credit
With a personal loan, you receive all your money as a lump sum. Then, you make even payments on the entire balance over the course of the loan term – regardless of how much you’ve spent. Whereas with a credit card, your only balance is what you’ve charged to it, within your approved credit limit.
The bottom line
Just like any type of financing, personal loans come with benefits and drawbacks for the borrower. Whether it’s a good choice depends on your individual situation and plan for the funds.
If you have strong credit, steady income, and are looking to consolidate high-interest debt, a personal loan could make a lot of sense. If you’re ready to take the next step, remember to shop with multiple lenders so you can negotiate better and lock in a lower interest rate, and carefully review all the loan’s terms and potential penalties before signing.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
By refinancing an existing loan, the total finance charges incurred may be higher over the life of the loan.
