Benefits of a Personal Loan
If you’re looking to get access to funds for a wide range of applications, a personal loan could be right for you. These products can fill in the gaps for surprise expenses, home projects, debt consolidation, and many other reasons, and you can often secure a much better interest rate than simply using a credit card. In this guide, we’ll outline the benefits of a personal loan and show you how to apply.
What We’ll Cover
- What is it?
- What are the main benefits of a personal loan?
- What are the best reasons to take out a personal loan?
- What are the reasons not to take out a personal loan?
- How to apply (including calculator)
- Loan application checklist
What is it?
A personal loan is an unsecured debt you can use for any number of expenses or projects. Whether you’re buying a large piece of furniture, have wedding expenses, or are looking to consolidate high-interest credit card debt, you can use these loans to quickly access funds of up to $50,000 or even more. Loans typically start from $1,000-$5,000, with an average of about $10,000 and can be obtained through a bank or alternative online lender.
As they are unsecured, by definition you won’t be using assets as collateral in order to be approved. Instead, your eligibility is primarily based on your credit score and history, and thus you’ll need to have decent credit and/or a qualified cosigner. If you’re struggling with poor credit (below 600), click here to learn how you can be in the best position to qualify.
Now, let’s talk about the benefits of a personal loan
What are the Main Benefits of a Personal Loan?
Here are some of the unique advantages of a personal loan compared to other sources for funds.
- Ease in applying - Whether you’re shopping for one at a bank or alternative online lender, most financial institutions can furnish personal loans in a short amount of time and have a streamlined application process.
- Quick access to money - Many people assume that the process will be tedious and require more time than it’s worth. But it typically takes a day or two, not weeks (or a month in the case of a mortgage) and some lenders give you access to funds within 24 hours.
- Fixed interest rates - Having a fixed-rate product is almost always a better way to access funds than charge cards or predatory cash advances.
- Better interest rates than credit cards and some other products - The average rate on a personal obligation is around 10%, whereas the average credit card is around 17% with some consumer cards running as high as 30%. With good credit, many of these can be obtained with mid-single-digit interest rates.
- Flexible payment terms - Unlike payday products with short repayment times and variable month-to-month credit cards, personal loans lock in a set rate and offer a range of repayment terms from one to seven years.
- Versatility - You can take one out for pretty much any reason, with ones that range from as little as $1000 to up to $100,000. That said, there are circumstances where a different product may be better.
Next we’ll outline the best situations for obtaining a personal loan. For more details about this, click here.
What are the Best Reasons to Take Out a Personal Loan?
High ticket items, flex spending, and vacations - While you certainly want to be more careful about taking on debt for these purposes, it can help fill in the gaps for what you weren’t able to save for.
Personal life events - Whether celebration or tragedy, surprise expenses can sneak up on anyone. A personal loan can help with divorce costs, funeral expenses, or even help cover a wedding.
Debt consolidation - Consolidation products streamline your payments and offer more flexible repayment terms. Just make sure the interest rate is better than the debts you’re combining.
Home renovation - You can take one out and get the project rolling quickly. However, home equity lines of credit (HELOC) can also be a good source of funds for home renovations. These borrow against the equity you’ve built in your home relative to the current market value. Additionally, there are specific home improvement loans available as part of your mortgage. You can learn more about home improvement options in our companion article here.
There are other circumstances where it would be ideal to take out a different kind of debt or find a better source for funds. Think of it this way: if you’re using an asset (or assets) as collateral, or there are specific products designed for your situation, then a personal loan may not be the best option.
What are the Reasons Not to Take Out a Personal Loan?
- Car loans and other big-ticket items - You’ll typically get a better rate and terms if you use the asset as collateral.
- Student loans - Besides government-backed student borrowing options that offer the best rates and repayment options, there are private debts that are well suited for education expenses. These factor in your future earning potential, not just your credit score and current eligibility.
How to Apply
If you haven’t done so already, you’ll need to determine how much you need and what you want your payments to look like month to month. This calculator makes it easy to put in your borrowed amount, interest rate, and term to help you get a good breakdown. Once you’ve done that, you’ll want to pre-qualify with a reputable lender and compare rates.
Here is what you’ll need to be prepared with when you’re ready to apply.
Checklist to Apply
- Government ID
- Proof of residence
- Credit score
- Employment info
- W-2 (or 1099 form if self-employed)
- Pay stubs
- Bank statements
- Proof of employment
- Cosigner info (if applicable)
Here are some additional frequently asked questions so you can acquire a loan with confidence.
Q: Can’t I get a better rate with a secured debt?
A: While there are circumstances where backing the debt with collateral makes more sense, a personal loan ensures that your assets aren’t at risk if you default. If you’ve got solid credit, the interest rates can still be competitive.
Q: What’s the best way to improve my situation if my credit isn’t the best?
A: If you aren’t in a position to improve your credit over time and a need arises, a cosigner is the easiest way to mitigate risk for the lender and get you a better interest rate and borrowed amount.
Q: How will taking one impact my credit score?
A: Making payments consistently and on time will improve your credit score. These loans can also help diversify your credit profile, which can improve your score. Naturally, your score will suffer if you fail to make payments and/or default on one.
A personal loan is a streamlined way to access funds without risking your assets or being subjected to a variable interest rate. With just a little preparation, you can tackle a project, cover surprise expenses, or even manage high-interest debt. While there are many benefits to a personal loan, only you can determine what products are best for you, and we’re here to help every step of the way.