34% of Americans have taken out personal loans within the last year. People take out personal loans for a variety of reasons, and sometimes, they can be perfect for what you need to get through a tricky financial situation.
If you’re wondering if a personal loan is right for you, this article will help you make an informed decision. Read on to learn everything you need to know about the pros and cons of these loans, the best small personal loans, and more.
How do Personal Loans Work?
Whether you take out a personal loan will depend on your unique circumstances, but there are a few things you should know before you sign on the bottom line.
Failing to do your homework or compare your options can lead to some bad consequences, such as a lower credit score, additional interest charges, and unexpected fees.
However, this doesn’t mean that personal loans are bad. Like any financial tool, they can allow you to manage your money in a way that works for you.
A personal loan is an installment loan. This means that you’ll borrow a certain amount of money, paying it back in monthly installments (with interest) over the life of the loan. This can range anywhere from 12 to 84 months.
Types of Personal Loans
There are two different types of personal loans:
These are when you back your loan with collateral. If you’re unable to pay for your loan, the lender can take possession of the assets you put up as collateral.
Unlike secured loans, these are not attached to any of your assets. Instead, they’re based on your past credit history, and your interest rate will be calculated based on your credit score.
There are many different options if you’re looking for lenders. You may think of a bank for your loan, but there are also plenty of online lenders, consumer finance companies, peer-to-peer lenders, and credit unions available.
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When searching for personal loans, be sure to check with the Better Business Bureau or Consumer Financial Protection Bureau to make sure that they’re legitimate.
When are Small Personal Loans a Good Idea?
Small personal loans make sense when you can comfortably afford to pay the monthly payments for the entire duration of the loan.
Many people use personal loans to consolidate their debt into one payment. This can make it a lot easier to pay down your debt if you currently have a lot of different payments. Usually, you’ll also benefit from a lower interest rate than your current debt, so you can pay it off much faster.
You can also use personal loans for home renovations, moving costs, unexpected expenses, car payments, weddings, and more.
Is a Personal Loan Right for You?
Your financial situation is yours alone, and you need to decide if choosing a personal loan makes sense for you. However, here are a few of the advantages and disadvantages to consider:
Some of the pros of personal loans include:
- A wide range of loan amounts, so you’re likely to find a lender who can provide you with the loan you need
- Fast approval times, since personal loans are easily obtained. The application process is also less rigorous online compared to a traditional bank
- Fixed interest rates make it easy for you to budget and create stability
- Personal loans have much lower interest rates than most credit cards
- Some lenders will not check your credit score
Some of the cons of personal loans include:
- No reward points or travel benefits compared to some credit cards
- You’re likely to pay fees for your loan
- There may be fees hidden in the fine print
- If your credit is poor, you’ll pay more interest
As you can see, there are both pros and cons to personal loans. If you think a personal loan is right for you, keep reading to learn how you can get the best loan possible.
How to Get the Best Personal Loan
If you’ve decided that you’d like to go ahead with a personal loan, there are a few steps you need to take. First, you’ll need to work out exactly how much you need to borrow. Now is also a good time to think about the monthly payments which you’ll need to pay, and consider whether you can add these to your expenses.
Next, you’ll need to begin searching for lenders. If you have a poor credit score, you may need to choose a lender that doesn’t check this, although you will likely pay more in interest and fees.
You have three main options for lenders: Banks, credit unions, and online lenders. These days, online lenders can often offer the best deal, since the sheer competitiveness of the market means that they need to stand out. Many offer extras like no fees, flexible payments, or options to lower the interest you pay during your repayment period.
Make sure to check the monthly payment, interest rate, and APR when you’re comparing your options. The APR has to include both the interest rate and any other fees that are part of the loan.
You may also be able to pre-qualify for your loan. This means that online lenders will do a soft credit check which won’t impact your credit score, but will let you know whether you qualify for a personal loan with them.
Be sure to read the fine print. Some lenders have an exit fee or prepayment penalty if you choose to pay your loan off early. It’s also a good idea to see if your lender will report on-time payments to credit reporting agencies which will help improve your credit score.
As you can see, there are many different options for small personal loans, and if you do your research, you can find the best deal for your specific circumstances.
Want to learn more about how to improve your finances? Check out our other great finance blog posts today.