The Benefits and Drawbacks of Obtaining a Personal Loan
What is a personal loan exactly, and what is the benefit? A personal loan is one granted on the basis of your credit history and your income. If you’re 18 years of age, you simply need to have used credit in the past and have a job or other source of income that allows you to make regular payments. Whether you want to consolidate your debt, move your family across the country or finance a large purchase, a personal loan could be a viable option for you.
But before you take out a loan, you’ll want to be sure it’s the right choice.
Why a Personal Loan Rather Than Credit Card?
Credit cards have their place. If you use a credit card and pay off the balance before the statement date, you’ll pay no interest. And if you accumulate airline miles or cash rebates on the things you buy everyday, you’ve got a sweet deal. However, at interest rates ranging from 15.38 to 22.53 percent, credit cards don’t make sense for purchases you’d like to pay off over time.
Also, if you only make the minimum credit card payment, you could be in debt for years. Let’s say you borrow $15,000 at 18 percent. If you make a 2 percent minimum credit card payment, you will be in debt for over 30 years and pay $37,670 in interest alone.
What Is a Benefit of a Obtaining a Personal Loan?
When you need larger sums of money, it may make sense to take out a personal loan. Here are the benefits:
You can pick your terms
A personal loan is an ideal way to stretch out your payments without racking up huge interest charges. Although the typical term for repayment is one to five years, you may get up to seven, depending on the lender. You can negotiate a regular and consistent payment that suits your budget.
Interest interest rates are lower than credit cards
The average interest on personal loans is roughly 12 percent, but depending on your credit score can be much lower. If you borrow $15,000 for five years with an origination fee of 2 percent, you’ll pay $5,020 in interest. That may seem like a lot until you compare it to the over $37K paid to the credit card company, as in the example above.
Personal loans work well for debt consolidation
If you have several high interest credit accounts, you may be able to lower your monthly debt payment. For sure, you will reduce the amount of interest you pay overall.
What Are the Drawbacks?
Before you run off to the nearest bank, remember that there are several reasons why a personal loan may not work. For example:
It can take up to seven business days to get the money.
If you need instant cash, a personal loan can be slow. Of course, it could be granted immediately, depending on the lender.
Payments are higher than with a credit card.
This could be an issue if, for example, you lose your job or become ill and can’t make the scheduled payments.
You might pay a loan origination fee.
This fee can range between 1 and 8 percent. It is either added to the loan, meaning you’ll repay it over the loan term, or you’ll make an upfront payment, in which case the fee will be deducted from the principal. In either case, the loan origination fee means that your APR is higher than the stated interest rate.
Your payment remains fixed. Yes, this can also be negative. If you need flexibility due to unforeseen circumstances such as a job loss, you’ll need to contact the lender to avoid damaging your credit rating.
What Is a Good Interest Rate for a Personal Loan?
It depends. Personal loan rates vary widely between 5 percent and 36 percent. The interest rate you’re offered is based on two factors:
- Your credit history
- The amount you borrow
You’ll have lower interest rates if you borrow a larger amount and have an excellent credit rating. You’ll pay more if you borrow a small amount and have a spotty credit record.
Shop around. Visit local banks, credit unions or online lenders to find the right option for you. But before you sign on the dotted line, make sure you educate yourself on available rates, as well as your own credit score.
Let SmartCredit Help Your Get Your Best Rates
If you want the best rates, let SmartCredit help you get your finances in order. With SmartCredit you can monitor, manage and protect your credit so you can take control of your future score. Once you take your credit from good to great, you’ll have the options you need to find the right solution. After all, there are plenty of lenders who will give you the rate you deserve.