5 Benefits of a Personal Loan

You have a credit card or two; why would you need a personal loan? Benefits of a personal loan include comparatively low interest rates, flexibility on how you use your loan and fixed payments over a set repayment schedule. There are more benefits too. The details:

Lower interest rates

If your credit card balances and interest rates are over the moon, a personal loan can potentially help with debt consolidation. Here's a scenario. Let's say you had to max out your only credit card after your car's engine blew up. Depending on how much you qualify to borrow, a personal loan can roll your credit card balance into your personal loan with a low interest rate and lower monthly payment amount. Personal loan rates are cheaper than credit card cash advances or "quick cash" payday loans.


You can use a personal loan in many ways. Unlike a dedicated credit account for a specific store or car repair place, you can use a personal loan to pay cash to vendors that don't accept credit cards. You can receive cash discounts for goods and services rather than using credit cards that charge vendors fees that are passed on to customers.

Improve your credit usage profile

In the example above, you have maxed out your available credit. According to FICO, a major credit scoring company, your credit utilization accounts for 30 percent of your credit score. If you've maxed out your available credit on one unexpected expense, it makes sense to apply for a personal loan. If approved, the personal loan would increase your available credit and your credit card balance would show as paid off.

Put an end to revolving balances and variable interest rates

Credit cards allow you to continuously spend within your credit line. In spite of making payments, your balance can increase if you continue to use your card. Credit cards may also carry variable interest rates that can change minimum payment amounts and increase interest owed on your credit card balance. Fixed-rate personal loans typically offer fixed interest rates with stable monthly payments and are paid off within a specified payment term. The Consumer Financial Protection Bureau cautions consumers to avoid running up more debt after consolidation; this can lead to owing more than you did before borrowing a personal loan.

Diversify your credit profile

Let's say you have only a couple of credit cards. Opening a personal loan would diversify your credit profile to show credit cards and an installment loan. Although types of credit amount to 10 percent of your credit score, diversifying your credit could increase your scores.

Things to Keep in Mind

Along with the benefits of a personal loan, there are other considerations:

  • Don't borrow more than you can reasonably afford to repay: You aren't going to quit eating for two weeks to make your personal loan payment. Before taking out a personal loan, be certain you can repay it.
  • Consider making more than minimum payments: Repaying your personal loan ahead of time can help improve your credit and your credibility with your lender; you may be able to borrow more for your next personal loan.
  • Why you need a personal loan: Once you qualify for a personal loan, you can use the cash for almost any purpose. While convenient, this flexibility can lead to trouble if you borrow for frivolous reasons and later cannot repay your loan. It's best to limit your borrowing to specific financial needs or covering emergency expenses that have to be paid.

When you're ready to apply for a personal loan, it's important to shop and compare multiple loan quotes to find a personal loan that works for you and your circumstances.

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