Did you recently have an unexpected expense pop up? Are you unsure about how you’re going to pay for it?
No matter how well we plan our lives out, sometimes we find ourselves in financial pickles that leave us strapped for cash. Don’t sweat it too much, though. You definitely have a few options available to you.
One of the best options in these situations is to take out a personal loan. Personal loans give you quick access to cash, and they can be more affordable than taking on more credit card debt.
If you’re asking yourself whether you should get a personal loan – this guide is for you.
What Is a Personal Loan?
A personal loan is a form of credit that a consumer takes out for various personal reasons, like making a big purchase or consolidating debt.
Unlike mortgages and auto loans, they’re not reserved for a specific purpose. You can use a personal loan for pretty much anything.
When you apply for a personal loan, you’re asking to borrow money from a lending institution (such as a bank, credit union or online lender). You pay the money back through fixed-amount installments with interest over a set time period until all of the debt has been repaid. The loan’s term will generally range from 12 – 84 months.
The Pros and Cons of Personal Loans
Like any loan, personal loans come with some benefits and drawbacks. Knowing the pros and cons can help you make a more informed decision when deciding if a personal loan is right for you:
|Personal Loan Pros ✅||Personal Loan Cons ⛔️|
|✅ No collateral required: Most personal loans are unsecured, which means they’re not backed by collateral. This means you don’t have to offer up your home, car, or other assets to guarantee that you’ll repay your loan. |
✅ Low interest rates and high borrowing limits: Personal loans tend to come with lower interest rates and higher borrowing limits than credit cards.
✅ Makes debt easier to manage: Many people take out personal loans to consolidate debt, which can lower their interest and makes managing finances easier.
✅ Quick access to money: In most cases, you can get approved and get the money in seven days or less.
|⛔️ High interest rates: Personal loans often come with higher interest rates than home equity loans and other types of secured loans. |
⛔️ Higher monthly payments than credit cards: With credit cards, you can make small minimum monthly payments, and there’s no deadline for paying off the balance in full. With personal loans, there are usually higher, fixed monthly payments, and you need to pay off the balance by the end of the loan’s term.
⛔️ Fees and penalties: Personal loans can come with fees and penalties that drive up the borrowing costs.
When To Get a Personal Loan
In addition to weighing the pros and cons, you’ll also need to consider whether your situation calls for a personal loan. Here are some valid reasons to take out a personal loan:
Consolidate high-interest debt
If you have a substantial balance on one or more of your credit cards, taking out a personal loan may be your best bet. According to data from the Federal Reserve, the average credit card interest rate in Q2 of 2021 was 16.3%. On the other hand, the average personal loan interest rate for the same quarter was 9.58%.
That difference can help you to pay down your balance faster and pay less interest overall.
Improve the value of your home
A personal loan is a great option for anyone facing significant, upfront home improvement costs. Whether you’re looking to renovate your kitchen or fix a leaky roof, taking out a personal loan may be cheaper than putting the expenses on your credit card.
Ask yourself two questions before you take out a personal loan: Is the home repair really necessary, and does it add value to your home? If you’re thinking about adding a swimming pool to your backyard but don’t have the money to pay for it upfront, it may not be worth the potential tens of thousands of dollars in debt.
If you have home equity available, a home equity loan (HELOC) may be a better option. Home equity loans usually come with lower interest rates and let you borrow against the equity in your home.
Improve your credit score
If you take out a personal loan and pay it back in a timely manner, you could see a boost to your credit score. This is especially the case if you have a track record of missed payments with other debts. The key thing is to use a personal loan to consolidate your debts – not pile on more debt.
Plus, if your credit report mainly shows credit card debt, adding a personal loan can help diversify your credit portfolio. Having a variety of loans and showing that you can handle them responsibly is seen as a plus for your credit score.
Pay for an unexpected life event
If you need money right away to cover bills and you don’t have an emergency fund, a personal loan may be the next best option. If you apply for a personal loan online, you can get your application approved in a matter of minutes.
You’ll get the money within a few days to pay off that unexpected medical bill, major auto repair or other emergency expense.
When To Avoid Personal Loans
Personal loans can be clutch when you’re in a bind. But there are some cases when they’re not the right choice and you may need to steer clear of them.
- You can’t afford it: Remember, you still have to pay the money back. Unless it’s an expense you can’t avoid, don’t take out a personal loan if you can’t afford the monthly payments, or you aren’t using the money to get rid of higher-interest debt.
- There are better loan options: A home equity loan or a home equity line of credit may be a better fit for projects like home improvements or repairs.
- You’re putting it toward something you don’t need: Think twice before you take out a personal loan to cover the cost of a vacation, a wedding or other non-essential expenses.
Weighing the Pros and Cons of Personal Loans
Now that you have some clarity on personal loans, it’s time to decide if a personal loan is right for you. Remember, debt can have its advantages and disadvantages. You should always weigh the pros and cons before taking on more loans.
Federal Reserve System. “Consumer Credit – G.19.” Retrieved November 2021 from https://www.federalreserve.gov/releases/g19/current/default.htm
Center for Responsible Lending. “Map of U.S. Payday Interest Rates.” Retrieved November 2021 from https://www.responsiblelending.org/research-publication/map-us-payday-interest-rates