Personal loans are a great financial tool for buying a home, funding an education, or making other large purchases. Many people have misconceptions about personal loans. Many think they’re not affordable, hard to get approved for, or bad for your credit score. Luckily, none of that is true! Personal loans are affordable, accessible, and won’t significantly impact your credit score — as long as you get approved for one responsibly and follow best practices when using them.
What is a Personal Loan?
You can obtain a personal loan from a financial institution, such as a bank or credit union, to cover a variety of expenses. Large purchases, like a car or a house, are frequently made with it. Because you don’t provide collateral for the loan, they are also sometimes referred to as “unsecured loans” (like a car or property). Budget app that links to bank account can help you track your personal loan payments. Unlike a home equity loan or a car title loan, personal loans are frequently unsecured loans with no requirement for collateral (where you put up your car title as collateral). Instead, you will pay a higher interest rate because the lender has no protection.
How to Get a Personal Loan
You can apply for personal loans online, over the phone, in person at a financial institution, or even through a personal financial app. Although applying online is frequently the quickest option, you might need to visit the financial institution in person if you need to sign any loan documents. You’ll probably be questioned when you apply for a personal loan about your employment, salary, debt-to-income ratio, and other things.
Advantages of Personal Loans
Achievable monthly payments
Personal loans are usually repaid over five years, meaning you’ll have a monthly payment that works with your budget.
While the terms and interest rates of personal loans vary between lenders, they often have more flexible terms than other common loans.
Affordable monthly payments
Because personal loans are repaid over time, they have lower monthly payments than a mortgage.
No collateral required
Unlike some other types of loans, like a home equity loan, you don’t need to put up collateral to get a personal loan. But you’ll likely have a higher interest rate and monthly payment as a result.
Disadvantages of Personal Loans
Higher interest rates
One of the biggest disadvantages of personal loans is the higher interest rate you’ll pay.
No prepayment penalty
If you’re getting a low-interest loan, that’s great. But if you have a high-interest loan, paying it off sooner would be beneficial.
Can negatively impact your credit score
While taking out a personal loan won’t have a significant negative impact on your credit, it can impact your credit score, which lenders use to decide whether to approve you for loans.
No equity built in your home
One of the biggest advantages of a home equity loan is that you’re leveraging the equity in your home—so you’re putting money into a property you own. With a personal loan, there’s no equity built in your property.
For the average person, personal loans are an excellent financial resource. They can be used to pay for practically anything, such as a new car, home improvements, or unanticipated medical expenses. Shopping around is the best strategy for finding a personal loan. To get the best deal, compare interest rates, repayment schedules, and other details. Keep in mind that since personal loans are unsecured, they won’t lower your credit score.