Top 6 Reasons to Get a Personal Loan

 Privacy Secured  |  Advertising Disclosures
 

Personal loans are one type of unsecured credit, and they can be used for almost anything, from paying medical bills to consolidating debt. If you find yourself needing funds to cover an expense, whether planned or not, a personal loan may be an option.

Here are six reasons to consider a personal loan.

  1. You won’t have to offer up collateral
  2. It may be a good alternative to a payday loan
  3. It may cost you less than high-interest credit cards
  4. It can help you organize your outstanding debt
  5. It can cover unplanned emergency expenses
  6. It can be used for anything

6 reasons why a personal loan may be a good option for you

1. You won’t have to offer up collateral

Personal loans are unsecured, which means that unlike a mortgage or auto loan, you don’t have to offer up property or assets to qualify. If you default on a secured loan, like an auto loan, you risk losing whatever collateral you used to back the loan.

That said, the cost of unsecured debt is generally higher because lenders have no fallback if you don’t pay. Car and home loan rates are in the single digits. And while you can get personal loans with similarly low rates, the best deals are reserved for borrowers with excellent credit. For example, LendingTree data shows an average APR of 7.09% for those with scores above 720 — compare that to 28.69% for those with a score between 620 and 639.

2. It may be a good alternative to a payday loan

If you have low credit, you may have considered using a payday loan to cover a purchase. However, payday loans are problematic, even if they are an easy way to access cash between paychecks. They come with sky-high interest rates and fees. Borrowers can get sucked into a debt cycle with these loans, too — in fact, more than 80% of all payday loans are rolled over or extended into another loan past their due date.

A lower credit score won’t necessarily disqualify you for a personal loan, but you may have to look a little bit harder at your options for a loan. There are a number of lenders who offer personal loans for bad credit and will work with you despite your low score.

Your search may be worth the trouble, though. A personal loan will likely have lower rates and fees than a payday loan, plus a longer repayment timeline.

3. It may cost you less than high-interest credit cards

A personal loan may give you the chance to secure a lower interest rate and a more manageable monthly payment than what you have on your credit cards. According to recent Federal Reserve data published in May 2019, the average credit card interest rate is 15.09%, while the average rate for a 24-month personal loan is 10.36%.

As Linda Erickson, a certified financial planner and founding partner of Erickson Advisors in Greensboro, N.C., noted, if you have the ability to borrow at a lower rate to take care of financial obligations, you do it — if it’s an urgent need.

In addition to a lower interest rate, you may be able to choose a term and monthly payment that better fit your current budget needs. That said, if you continue using your credit cards anyway, you may find yourself deeper in debt.

4. It can help you organize your outstanding debt

If you have debt across several credit cards with crushing interest rates, a personal loan is one way to consolidate that debt — which can help you keep better track of payment due dates and possibly save you interest over time. Debt consolidation is the most common use for personal loans, according to a LendingTree study from January 2019.

Here’s how it works: you take out a personal loan and use the cash to pay off all of your outstanding credit card bills (and other debt, if you have it). From there, you only have to make a single monthly payment, and depending on your loan, that payment may be lower than all of your other monthly bills combined.

Another benefit: most personal loans have fixed interest rates and payments, so your bills are consistent and predictable and won’t increase over the life of your loan.

5. It can cover unplanned emergency expenses

Less than half of Americans could afford a $1,000 emergency and six in 10 have had a recent emergency that cost them at least that much, according to a 2018 LendingTree survey. That means plenty of people go into debt to cover unplanned expenses, which can negatively affect credit scores and rack up a lot of interest.

If you have an emergency medical expenses, your HVAC unit breaks in the dead of winter, or your car dies and leaves you without a way to get to work, a personal loan may be less expensive than using a credit card — and save your credit score from damage due to unpaid bills.

6. It can be used for anything

You can use a personal loan for just about anything: debt consolidation, medical expenses, moving costs, home improvement projects, a car or your wedding. When you’re approved for a personal loan, you receive a lump sum of cash to spend however you’d like with no restrictions from the lender. As we’ve mentioned, this may be a cheaper alternative to other types of credit, including high-interest credit cards, depending on the rates and terms you receive.

But just because you can borrow doesn’t mean you should — personal loans still cost money and have to be paid back, so consider whether your spending is something you want or something you need.

“Do I want to take out a personal loan because my family expects a vacation that costs $15,000 a year?” says Erickson. “No. You do those kinds of things out of cash flow, and if you can’t afford it out of cash flow, you don’t do it.”

Health maintenance for you and your pets. Preventive care is important for good health, but if you don’t have dental insurance, it will take a bite out of your budget. Use a personal loan to pay deductibles or uncovered health care expenses. You can also use a personal loan to pay for veterinary care.

The bottom line

A personal loan is a useful tool in the right situation, but it’ll still cost you interest (and you still have to pay it off to avoid damaging your credit). Before you dive headfirst into this commitment, weigh all of your options — including the cost of each — and ask yourself if you really need to take out a personal loan.

“We are a society that has learned to feel very comfortable with debt, and we need to pull that back a little bit and be less comfortable with debt,” Erickson says.

The information in this article is accurate as of the date of publishing.