What Is A Benefit Of Obtaining A Personal Loan In 2023?
There are many reasons why you would take out an unsecured personal loan–and there are many benefits to doing so as well. With predictable loan payments, flexible uses for the loan proceeds, and widely available, there are many benefits that come with taking out a personal loan.
Continue reading below as we walk through what an unsecured personal loan is, the benefits of taking out a personal loan, and some of the alternatives to personal loans that you may want to consider instead. ‘
Read More: Best Personal Loans 2023
What Is A Personal Loan?
A personal loan is a type of unsecured loan that someone gets from a bank, credit union, or other financial institution. It provides borrowers with a lump sum of money that they can use for a number of reasons, like debt consolidation of existing debt, to cover unexpected expenses, to cover medical bills, pay for a vacation, and more.
Each institution has its own qualifications for getting approved for a personal loan, like a minimum credit score. In turn, personal loan lenders will each charge different personal loan rates based on the borrowers’ credit history, income level, and other factors.
What are the Benefits Of Obtaining A Personal Loan?
To begin our discussion, let’s talk about what the main benefits are of obtaining a personal loan.
One of the things people love about personal loans is that you can use the borrowed funds for many different things. Unlike other loans like student loans or mortgages, the funds that a borrower receives from a personal loan aren’t limited to narrow use cases. So, if you want to borrow money with a personal loan to make a large purchase, cover home repairs, or pretty much anything else, you can with your personal loan funds.
Many people like that you know what your monthly payments will be when you take out a personal loan. It doesn’t depend on your level of spending, and it typically won’t change throughout the repayment period.
The amount of the monthly payments that is set forth in the loan agreement at the beginning is what you will need to pay each month. With this, there are no surprises with a predictable repayment schedule, and it gives you the ability to plan for the monthly payments to incorporate into your budget.
One of the common benefits of taking out a personal loan is that you can use it to consolidate debt. This is generally beneficial if you have high-interest debt from multiple credit cards or if you have multiple loans with varying repayment terms, as you can consolidate it all into one monthly payment, typically at a lower interest rate.
Borrow Large Sums
Another benefit of taking out personal loans is the fact that you can borrow large sums of money. There is no guarantee that you’ll be approved for the highest amount that you ask for. However, you can generally get access to a good amount of money when you take out a personal loan.
In most cases, a personal loan lender will not require collateral in order to approve the applicant for the loan. This is because personal loans are often unsecured personal loans. However, if you are looking to take out a secured personal loan, you may need to put up something as collateral like your car or savings account.
Read More: Getting A Personal Loan With Cosigner
The Risk Of Obtaining A Personal Loan
There are many personal loan pros, but there are also some risks to taking them out as well. We will now discuss some of the risks to consider before you take out a personal loan.
Something to consider is that since most personal loans are generally unsecured, they often come at higher interest rates to make up for the increased risk to the lender. Of course, the actual interest rate that you’ll be charged will depend on a number of factors like your credit history. However, you can expect to be charged higher interest rates on unsecured loans compared to secured loans.
Upon taking out the personal loan, you’ll likely be charged an origination fee by the lender. This is typically a percentage of the loan amount, though you may be able to find some lenders who do not charge this fee. However, it will typically be made up for with a higher interest rate instead.
There are a few ways you may pay the origination fee, including subtracting it from the proceeds you receive, or incorporating it into your monthly payment going forward.
Read More: Best Personal Loans With No Origination Fees 2023
You may also be subject to prepayment penalties if you pay off your personal loan early. Many lenders will charge this to make up for the other money they would have made through interest throughout the rest of the repayment term. So, keep this in mind if you want to pay off your debt relatively quickly, as you may have to pay extra for that.
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How To Decide If A Personal Loan Is Right For You?
There are many things to consider before you borrow funds through a personal loan. First, consider the benefits of obtaining a personal loan and the disadvantages. Once you’ve done so, you can consider some of the following factors that can help you determine which personal loans are right for you and your unique circumstances.
First, decide on the amount you would need to borrow, and see if a lender offers personal loans of this amount. If you only want to borrow a few hundred dollars, you may not find that a personal loan is the best option given the fees they’ll charge. So, you may want to consider other options for borrowing money if this is the case.
Another thing that can help you decide if taking out a personal loan is the right option for you is to see what lenders are out there, and if any are offering special deals if you apply by a certain time. Once you see what options are available to you given your credit history, you may decide for or against it.
Consider the ideal timeline for you for repaying back the borrowed funds. If you need to make one lump sum payment and plan to repay the debt back fairly quickly, personal loans may not be the right fit, especially if they charge prepayment penalties. But, if you want to pay it back over a few years, personal loans could be a good idea.
Read More: Best Personal Loans For Fair Credit 2023
Alternatives To Personal Loans
There are a number of alternatives to personal loans depending on what you’re utilizing the funds for.
Let’s go through some of the top personal loan alternatives that you can consider.
One option you can consider aside from a personal loan is getting a credit card. Especially if you can find one with an introductory rate of 0% for the first 12 months, you can essentially borrow money up to your credit limit for free until that point.
Of course, you want to avoid carrying credit card debt that you won’t be able to pay off, so don’t confuse this. But, if you need a small amount of money in a shorter period of time like emergency expenses or one large purchase that you know you’ll be able to pay off within a year, getting a credit card is a great alternative.
Home Equity Line of Credit
If you are a homeowner who has built up equity in your home, you may be able to secure a home equity line of credit (HELOC) with your bank. The amount you’ll qualify for will depend on a few factors, including the amount of equity you have built up, like with home equity loans.
This is a type of secured loan that is backed by the value of your home, just like a home equity loan. This compares to unsecured loans like personal loans, which tend to have higher interest rates.
Keep in mind that when you have secured loans on your house, you could risk losing your home if you are unable to make the repayments. So, you will need to determine if you’re willing to take on this risk.
If you’ve been contributing to a 401(k) retirement plan, you can consider drawing money from your fund rather than borrowing it from a bank or credit union.
This can be a good idea if you have a steady job and know you’ll be able to pay off the debt relatively quickly.
There are tax penalties for taking this route, though people that have low credit scores or don’t want to deal with applying for a loan with a bank like this option instead of personal loans.
How Do You Take Out A Personal Loan?
Taking out a personal loan isn’t too complicated of a process, though we’ll walk you through the steps here.
Know Your Credit Score
The first step in this process is checking your credit score. This will help you determine for yourself if you’ll be able to qualify based on the minimum requirements of lenders. Plus, it’s important to know that the higher the credit score you have, the lower interest rates you’ll be offered, and vice versa. This is something to consider when you’re figuring out the affordability of taking out a personal loan, and is a good starting point.
Choose a Lender
Once you’ve decided that getting a personal loan is the right move for you and your unique needs, you need to choose a lender. You can compare the interest rates, requirements, and special offers that many lenders make public so you can choose the best option.
If you have a high credit score, you’ll often have many different options to choose from. If you have bad credit or a lower credit score, you may be more limited in the lenders and options available to you.
After you’ve selected a lender, you can get started with the application process. Refer to the financial institution to see what information they will require you to provide, and make sure you have these gathered before you go in to apply. This can include pay stubs, proof of any collateral if you’re applying for a secured loan, and other information.
Apply & Wait
With all the proper documentation ready, you can apply for the loan and wait for the decision. Upon your approval you will receive the funds from the financial institution and will likely begin repayment of the loan in that first month.
Hopefully you now know some of the benefits of taking out a personal loan. With predictable monthly payments, flexible spending, and more, there’s a lot of reasons why you’d turn to personal loans when you need access to funding or are looking for debt consolidation of existing debts.
With one single personal loan, you can use the funds for a variety of different purposes–like making home improvements, cover business costs, make large purchases, and much more.
Frequently Asked Questions (FAQs)
Yes, consolidating debt is generally one of the most common use cases of personal loans when someone has high-interest debts like on credit card balances. Every lender may not allow for this, so make sure to check this out ahead of time. But, this allows you to take payments from multiple credit card accounts or loans and make one fixed rate monthly payment, which can help you save money on paying interest.
Yes, payday loans are considered short-term unsecured loans.
Not all of them will have a fixed rate. Some can have a variable rate that fluctuates with the market.
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Unsecured Personal Loans | FederalGrants.com. www.federalgrants.com. Accessed April 20, 2023. https://www.federalgrants.com/unsecured-personal-loans.html
WHAT YOU SHOULD KNOW ABOUT Home Equity Lines of Credit (HELOC). consumerfinance.gov. Accessed April 20, 2023. https://files.consumerfinance.gov/f/documents/cfpb_heloc-brochure_print.pdf
Retirement Topics Loans | Internal Revenue Service. www.irs.gov. Accessed April 20, 2023. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-loans
What do I need to know if I’m thinking about consolidating my credit card debt? Consumer Financial Protection Bureau. Accessed April 20, 2023. https://www.consumerfinance.gov/ask-cfpb/what-do-i-need-to-know-if-im-thinking-about-consolidating-my-credit-card-debt-en-1861/