Personal loans are a great option for those who don't qualify for home equity loans, but personal loan interest rates are typically higher than for secured loans such as home equity loans or vehicle loans. If you need to borrow money, here are a few things to know about personal loans and their interest rates:
What: Personal loans are also called signature loans or unsecured loans. They are considered "unsecured" because there is no collateral (property that can be repossessed if the borrower does not repay the loan). The lack of collateral on personal loans represents a higher risk to lenders and causes them to charge higher interest rates than for loans secured by things like cars or real estate.
Where: Personal loans are typically offered by banks, credit unions and savings institutions. You can also shop online for the best personal loan interest rates. LendingTree's network of lenders can supply multiple personal loan quotes for your review and comparison.
Why: Personal loans can be used for almost anything – debt consolidation, emergency expenses and college expenses are a few examples.
Not the Same as Pay Day Loans: Some lenders offer payday loans, also called cash advance loans. These loans must be repaid over a period of days or weeks and typically carry very high interest rates and fees. A personal loan is offered for a specific amount of money and repaid over a period of months or years. Personal loan interest rates are much more affordable than rates on pay day loans; you repay a personal loan over a longer time at less cost.
Personal Loan Benefits
Taking out a personal loan can provide several benefits:
- Affordable loan with scheduled repayments and usually fixed interest rates
- Establish or improve your credit history with on-time payments
- Less costly than cash advance, payday or pawn shop loans
- Funds available faster than with a home equity loan
- No risk of losing your home or vehicle if you can't repay a personal loan
Personal Loans: Things to Consider
While it's possible to use a personal loan to get cash for non-essential purposes such as recreational shopping and vacations, this can later cause problems if you have a financial hardship.
According to Investopedia, unsecured personal loans typically require borrowers to have good credit.
If you haven't established credit and apply for a personal loan, lenders may ask you to provide a co-signer. This person guarantees payment of your personal loan in case you can't repay it. It's important to consider the potential impact on your relationship with a co-signer if he or she must repay all or part of your personal loan on your behalf.
Personal loan interest rates may be attractive, but finance charges are added to your loan amount. It costs money to borrow money, so careful decisions about how and when to use personal loans can ultimately help you save. Shop and compare quotes to find your best deal on personal loan interest rates and fees.