A personal loan is when you borrow money from a bank, lender, or credit union in the form of an unsecured loan; the loan is paid back in installments over the course of several years with interest.
There are positives and negatives in taking out a personal loan - it’s certainly not for everyone or for every financial situation. That being said, there are important things to know when taking out a personal loan that may impact your decision. Let’s take a look below.
Take Out the Loan for the Right Reasons
While a personal loan can be a lifesaver in certain situations, it should never be taken out for some reasons. Personal loans should be used for substantiated needs, such as:
- Medical bills
- Debt consolidation
- Home remodels
- Moving expenses
- Funeral expenses
You should never take out a personal loan for something that you can delay and save up for instead, such as a vacation or wedding expenses. It’s not fun or financially responsible to incur debt on unnecessary purchases, especially large ones.
Be Sure a Personal Loan is the Best Choice
While a personal loan can be helpful in some financial situations, sometimes there are better options. Be sure to weigh your options before taking out a loan. Perhaps the money would be better spent coming from a 401k plan or other retirement account? What about transferring your credit card debt to a 0% interest credit card and paying everything off within the promotional period?
Your Credit Score Determines Your Loan
As with any loan, your credit score will heavily impact the amount of loan you qualify for and what your interest rate will be. Make sure your credit score is in the best shape it can be in before you apply for a personal loan, otherwise you could end up paying hefty APR’s and fees.
Interest Rates Can Be High
Even when you have a good credit score, the interest rates on personal loans can still be pretty high. If you aren’t finding the loan offer you want, consider checking with a credit union. Credit unions are known to have some of the lowest APR available for loans and could save you a lot of money in the long run.
You Don’t Have to Go Through a Bank
As previously mentioned, credit unions can be a good option for your personal loan; however, there are quite a few other “marketplace lenders” available these days as well. Marketplace lenders are sometimes referred to as “peer-to-peer” and will essentially pair you with other investors who have signed up to offer the loan.
You Can Save by Taking Out a Personal Loan
If you have mounting debt, taking out a personal loan can help you consolidate that debt into a smaller, more manageable loan at a more reasonable interest rate. While this option can be useful, it’s vital that you also budget for handling debt consolidation in this way, otherwise you may end up further in debt than before.
Fees and Extra Charges Can Impact Your Loan
Personal loans are no stranger to throwing in extra charges and fees. Carefully review any loan being offered to you and familiarize yourself with extra fees and charges that are written in. You may want to remove some options that have been added into your loan agreement and save yourself the extra cash. If some of the fees you see in the contract seem unnecessary and the loaning company is unwilling to remove them, you may want to consider looking elsewhere. You should never overpay on a loan just to finance a purchase or try to save money on debt consolidation.