A personal loan is short-term financing that you can get to pay off a debt or make a large purchase. Personal loans usually have fixed monthly payments and can have lower interest rates than credit card debt.
Here’s how to decide if a personal loan is right for you.
Secured vs. Unsecured Personal loans
When you’re shopping around for a personal loan, one of the biggest choices you need to make is whether you want a secured or unsecured loan.
Secured loans are tied to collateral, like your house or car. These loans are considered less risky to lenders because if you can’t make payments, they can sell the collateral to get their money back. For the borrower, this can mean lower interest rates.
An unsecured loan does not have collateral tied to it. Because of this, most lenders will only give unsecured loans to people with really good credit who have shown that they will pay their debts back.
Pros and Cons of Personal Loans
Here’s what you should consider before applying for a personal loan:
| PRos | Cons |
|---|---|
| Can be used for many different expenses | High interest rates if you don’t have good credit |
| Fixed interest rates mean predictable monthly payments | Origination and prepayment fees |
| Approval can be faster than other types of loans | Could lead to more financial strain if misused |
When Should You Consider a Personal Loan?
Here are some scenarios where a persona loan can make sense:
- Debt consolidation: Combining all of your debts can sometimes save you money on interest.
- Emergency expenses: Personal loans can be cheaper than payday loans.
- Home improvements: An alternative to a home equity loan.
- Large purchase: If you can get lower interest rates than a credit card, this can be a better way to finance.
When Should You Avoid a Personal Loan?
Sometimes a personal loan isn’t the right choice for your situation:
- Interest rate is too high: If you can get lower interest rates another way, it’s better to take that option.
- High debt levels: If you already have a lot of debt, a personal loan can just make things worse.
- Expense is unnecessary: If the expense is extremely necessary, it’s best to avoid taking a loan out for it.
FAQ
- Is a personal loan a good idea for debt consolidation?
- Yes, if you can get terms that save you money.
- How do personal loans affect credit scores?
- If you make payments on time, it can be good for your credit score. If you miss payments, it can be really bad for your credit score.
- What credit score is needed for a personal loan?
- It’s possible to get approved if you have Fair credit, but you will get the best rates if you have Good or Very Good credit.
- Are personal loans better than credit cards?
- Personal loans can sometimes be better than credit cards because they often offer lower interest rates,
- How can I qualify for a lower interest rate?
- Make sure you have very good credit.