Last year, about 114.4 million Americans took out personal loans for various reasons. That’s about 44.81% of the population. For most people, personal loans are their go-to choice when they need financial assistance.
Personal loans are also known as unsecured loans because you don’t need to borrow these loans against any asset as security. With personal loans, you borrow a fixed amount that you then repay over a fixed term. However, the question still remains: Are personal loans worth it?
You can borrow personal loans from $1000 to $15,000. Some large lenders can even offer loans of up to $25,000. As for the terms, you should expect to repay the loan after one to five years, depending on the lender.
In this post, we’ll be looking at a few factors you should keep in mind before taking out a personal loan. Keep reading if you plan on borrowing a personal loan to see whether it’s such a great move.
What Is a Personal Loan?
Personal loans fall under a large group of loans called investment loans. That means you pay back the loans in monthly installments with interest over the entire repayment period. The moment you complete your loan repayment, the lender closes your account.
That means you have to reapply afresh if you want to take out another personal loan. It’s easy to apply for and get a personal loan. The repayment terms are also more flexible when compared to other loan types.
However, just like any other loan, you’ll need a valid reason before the lender can grant you a personal loan. You should also consider the different loan options and find one that’s best-suited for your financial situation.
Types of Personal Loans
There are many personal loan options for your consideration. Here are the few types of personal loans and how they work
1. Unsecured Loans
Unsecured loans are the most common types of personal loans that even the term “personal loans” is sometimes used interchangeably with unsecured loans. As explained earlier, unsecured loans are loans without any assets for security. That means you don’t have to borrow the loan against your house, car, or any other asset you own.
Since the loan isn’t secured, the lender will use your credit score to determine the loan amount you qualify for. Borrowers with excellent credit scores can even qualify for loan amounts of up to $100,000. Larger loan amounts have longer and more flexible repayment terms.
2. Secured Loans
Secured loans are the opposite of unsecured loans. That means you have to borrow these loans against your assets as security. With such collateral, the lender can take hold of these assets should you fail to pay back the loan.
Because secured loans are less risky for the lender, it’s way easier to land a secured loan than an unsecured one. However, it also means putting your most prized assets at stake. Secured loans may be an ideal option for people with poor credit scores.
3. Debt Consolidated Loans
Debt consolidation loans roll up all your debts into a single loan that you repay every month. Most people borrow debt consolidation loans to pay off credit card debt. However, you can also use debt consolidation loans to clear medical bills or pay off other loans.
A consolidated loan reduces how much you have to pay each month for your separate loans. However, this doesn’t mean that you should run balances back up on your credit cards or get further into debt. If you have proper debt discipline, then you should consider this type of loan.
4. Personal Line of Credit
With this loan, you get access to a line of credit that you can borrow from until a certain amount. The lender charges you interest based on your outstanding balance. You don’t pay any monthly installments.
These loans are ideal for emergencies and unexpected expenses. While some lenders may need backing with assets, most lenders grant these loans unsecured.
5. Cosigned Loans
Unlike the above loans, cosigned loans involve two or more parties giving repayment assurance. A cosigner guarantees loan repayment if you default on the loan. The cosigner, in most cases, is someone with a better credit score or assets that can act as security.
A cosigned loan can be both secured or unsecured. Having a cosigner increases your chance of securing loans of larger amounts. A cosigned loan is also less risky for the lender.
Are Personal Loans Worth It?
There’s no simple answer to this question because it boils down to your unique situation. However, here are a few factors you should consider before borrowing a personal loan.
Credit Score Impact
The first thing you probably want to know is whether the personal loan will impact your credit score. While personal loans impact your credit score, they only do so to a lesser extent. Plus, regular on-time repayments could actually boost your credit score.
Also, most lenders require your credit score as a crucial part of your loan application process. Most lenders refer to this as a hard inquiry. This hard inquiry may have a slight negative impact on your credit score.
The Interest Rates
Don’t go rushing for a personal loan until you understand the interest rates. Apart from interest rates, there are probably other fees you should be well aware of. Let’s look at all of them in detail.
Interest– The longer your repayment period, the more interest you end up paying. Interest rates vary from lender to lender. A better credit score attracts a lower interest rate, which translates to lower interest fees.
Prepayment Penalties– Sometimes, paying your loan earlier may not be such a good idea. Some lenders may penalize you because that means you’re denying them some interest. That’s why it’s super important to read the fine print before borrowing any loan.
Origination fees– This is money that some lenders charge for processing your loan. It’s usually a minimal amount that’s nothing to worry about.
Make sure you crunch all the numbers before taking out the loan. You may find that you’ll have to repay a much larger amount than what you borrowed. If that’s the case, then you might want to consider another lender.
Where to Get Personal Loans
Most people get their personal loans from banks. However, apart from banks, you could also get your loan from other lenders. For instance, you can get a personal loan from credit unions, P2P lenders, and other private lenders.
In recent times, online lenders have been all the rage. You can get a personal loan from these online lenders if you meet their qualifications. Rightway Funding, for instance, is popular for its flexible repayment terms and lenient qualification criteria.
Before you pick a lender, make sure to explore all your options and find the best. Also, there are plenty of illegitimate online lenders, so check out testimonials and reviews before paying any processing fees. If you meet the loan qualifications, getting a personal loan should be a breeze.
Advantages of Personal Loans?
Personal loans seem to be very beneficial, no wonder so many people go for them. Here are a few advantages of personal loans.
You make loan repayments in fixed monthly installments. This makes it easier for your budgeting and financial organization. Steer clear from any lender that fluctuates the monthly payments.
Competitive Interest Rates
Due to the sheer number of lenders, you get to choose from lenders with competitive interest rates. If you’re borrowing large amounts of about $15,000 and upwards, the rates are even more competitive.
With personal loans, you can consolidate all your debt into one single debt. This helps you lower your monthly repayments and saves you a ton of money in the end.
Flexible Repayment Terms
Some lenders have repayment terms of up to five or seven years. Paying back your loan isn’t something that will bother you.
Disadvantages of Personal Loans
Personal loans aren’t without their downsides. Here are some disadvantages of personal loans.
Higher Interest Rates for Lower Loan Amounts
Interest rates are likely to be much higher if you borrow for small loan amounts. If you’re looking for a small loan, you might want to look somewhere else.
You have to pay whatever monthly installment the lender stipulates every month. You can’t pay a lower amount even in tough periods.
The Arrangement/Origination Fees
With most lenders, you have to pay an origination fee for facilitating your loan. You could lose your hard-earned money should the lender be illegitimate.
Penalty for Early Repayment
You will pay a fine if you pay back the loan too early. This fee is so that the lender doesn’t lose interest.
Weigh the pros and cons of personal loans carefully before opting for one. It might be great for some, but not worth it for others.
The Choice Is All Yours
Are personal loans worth it?
Only you can answer with certainty. However, we hope this article puts you in a better place to answer it. At the very least, before taking out a personal loan, make sure you do your homework on the lender.
Loans aren’t our only area of expertise. For more informative reads, check out the other pieces on the site.