Need some extra financing? While there is a number of lending products to consider, one of the most versatile is a personal loan.
One of the great things about a personal loan is that you can use it for just about anything.
Before jumping in though, it is wise to educate yourself on personal loans. You also should ask yourself some questions to determine whether a personal loan is the most suitable option for your needs.
There are a couple of situations where it doesn’t make sense to use a personal loan. For example, let’s say you want to get a loan to pay for your education. In a situation like that, a federal student loan would be more flexible and affordable.
It is also not wise to use a personal loan if you are in a situation where you cannot keep up with your debts unless you need to use it for consolidating them.
Award-winning finance writer Holly Johnson (@ClubThrifty) at Club Thrifty explains, “If you’re struggling to make payments on credit cards, student loans, or other bills, chances are good borrowing more money will not help. In fact, borrowing more cash just to stay on top of your expenses could lead to a debt spiral in a hurry.”
One reason to consider a personal loan is as an alternative to a lending product which has a higher interest rate.
Senior Manager Tom Sumrak (LinkedIn: Thomas Sumrak) at LendingTree says, “According to a January 2015 Federal Reserve report, average rates for credit cards were 13.91 percent, while interest rates for 24-month personal loans averaged 10.22 percent. It may be possible to obtain a better rate with a personal loan than with a credit card.”
Along with featuring comparatively low-interest rates, a personal loan may be more predictable in terms of cost. Rates and terms for credit cards may fluctuate, but with a personal loan, they can be fixed.
Sumrak also writes that a personal loan may help a consumer to reduce credit card overspending habits. Additionally, one can take out a personal loan to work on increasing one’s credit score.
While online lenders often offer easy credit qualification for personal loans, you will get the lowest interest rates if your credit score is solid.
Finance author Rebecca Lake (@seemomwrite) at SmartAsset writes, “Paying your student loans and other bills on time each month and applying for a secured credit card with a low limit are two effective ways to establish credit. Payment history accounts for 35% of your FICO score so it’s a good idea to focus on that area if you’re aiming to get a personal loan with the best rates.”
If maintaining your credit score is important to you, you should be mindful of where you apply for a loan. Many lenders damage your credit scores when they run what is called a hard credit check. Try and apply online for a personal loan through a site that features a soft credit check instead.
You also should be aware that personal loans can range widely in interest. They also carry origination fees. If you pay off a personal loan early, there may be a prepayment penalty. This varies from product to product, so do your homework.
Personal loans can be a great tool in your financial toolbox. If used appropriately, it can not only provide you with the financial means you need to achieve a goal, but it can also help you to improve your credit score while taking advantage of competitive rates.
Holly Johnson (@clubthrifty) is the owner of the website Club Thrifty and an award-winning finance author. She has been published in US News & World Report, and is one of the authors of the book “Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love.”
Tom Sumrak (@tomsumrak) is a Senior Manager at LendingTree. Over the years that he has worked as a broker, he has developed strong expertise in a wide variety of financial products.
Rebecca Lake (@seemomwrite) – with around a decade of experience under her belt, Rebecca Lake has become an authority on topics relating to personal finance. Her work has been published in CBS News, The Huffington Post, US News & World Report, and other major publications.
John has been a freelance writer for the past 3 years. He worked for 4 years as a Mortgage Consultant and a Financial Advisor. He also worked for 2 years as a Loan Manager for a medium sized company that handled bad credit loans, car loans and personal loans. We are excited to have John in our team!
John writes about Finance, Philosophy, Money Saving Tips and much more. He is a proud Member of Financial Advisers Australia (AFA) and has Cert IV in Financial Services.