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What Is a Personal Loan – Pros & Cons of Getting One

What Is a Personal Loan – Pros & Cons of Getting One

The Lopez family was excited about finally getting to remodel their kitchen, something they’d been wanting to do for over a year. However, their excitement transformed into anxiety when their contractor told them the bills for the project would come to around $20,000. They knew they could charge it all on their credit card, but the most they could possibly squeeze out of their budget to pay it back would be $500 a month. At that rate, they’d take nearly six years to pay off the debt and pay more than $7,000 in interest.

The Lopezes were all set to scrap their plans for their dream kitchen when their contractor told them about another possible way to fund the remodel: a personal loan. With their good credit, they could get a five-year loan at an interest rate of around 7% – half of what they’d have to pay on their credit card. Not only could they pay it off faster, their monthly payments would be just under $400, leaving them with a lot more wiggle room in their budget.

Personal loans aren’t nearly as common a way to borrow money as credit cards. According to the Federal Reserve, only 10% of Americans applied for a personal loan in 2016, while roughly 65% applied for credit cards. However, their popularity is growing. TransUnion reports that personal loans in the United States grew by double-digit rates every year between 2014 and 2017, reaching an all-time high of $107 billion by the middle of 2017.

The type of borrowing most people know best is credit cards, which are a form of revolving debt. They give you access to a pool of cash that you can dip into as needed. You can take as long as you like to pay off this debt, as long as you meet the minimum payment each month, and the interest rate is likely to vary over time.

Personal loans are completely different. They’re a type of installment loan, in which you borrow money from a bank or other lender and pay it back in regular monthly payments over a fixed period of time. The term for most personal loans is between two and five years, but it can be as little as one year or as long as seven. The interest rate is usually fixed over the entire life of the loan.

There are two main types of personal loans:

People take out personal loans for a variety of reasons. The most popular ones include:

There are several places to apply for a personal loan. You can get this type of loan through traditional banks, credit unions, online lenders like Upstart, or peer-to-peer (P2P) lending networks like Prosper and Lending Club. Online and P2P lenders are convenient to use, but some of them aren’t available to borrowers in every state.

No matter what kind of lender you use, it will want to look at your finances before approving you a personal loan. The lender will pull your credit report and check out details like your credit history, credit score, and debt-to-income ratio. The better your credit is, the more likely you are to qualify for a loan, and the better the interest rate will be.

If you need to borrow money, there are several reasons why a personal loan might be a good choice. For instance:

Despite their benefits, personal loans aren’t always the best way to borrow money. Here are a few of their drawbacks:

Depending on your situation, a personal loan might not be the best way for you to borrow money. Before taking one out, check out these alternatives to see if one of them is a better deal for you:

If you decide that a personal loan is the best way for you to borrow money, there are several steps you can take to make sure you get the best deal possible:

Personal loans can be a convenient way to borrow money, but they’re not ideal for every situation. A zero-interest balance transfer is often a better deal for those with good credit, and straight-up credit card borrowing can be better for those with poor credit. The only way to know for sure is to do the math for yourself.

Have you ever taken out a personal loan? Would you recommend it?

Categories: Credit and Debt, Loans

Amy Livingston is a freelance writer who can actually answer yes to the question, “And from that you make a living?” She has written about personal finance and shopping strategies for a variety of publications, including ConsumerSearch.com, ShopSmart.com, and the Dollar Stretcher newsletter. She also maintains a personal blog, Ecofrugal Living, on ways to save money and live green at the same time.

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What Is a Personal Loan – Pros & Cons of Getting One

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