Is a personal loan right for me?

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By Doug Matus

In some ways, personal loans can seem like relics of bygone days, when “signing on the dotted line” was more than a turn of phrase. With the omnipresence of credit cards and seller financing, the average consumer may not understand the practical use of traditional loans.

Personal loans still have a great deal of relevance, especially for young adults. To decide whether a personal loan is right for you, you should consider the common circumstances that lead people to get them. It will also help to understand the benefits of these loans, along with their interactions with credit card debt.

Reasons to Get a Personal Loan

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Personal loans are ideal for people with verifiable income and good credit, but limited resources. In other words, these loans can seem like a saving grace for young professionals in need of money for a major event or unforeseen expense.

“A scenario where it may be a good idea to get a personal loan is when paying for a large event, such as your wedding,” says Leslie Tayne of Tayne Law Group. “If taking out a personal loan for this purpose, you can save a large amount on interest charges as compared to using your credit card.”

Personal loans also work wonders for the first-time home buyer. If you can’t afford the mortgage to buy your dream home outright, a personal loan for improvements can let you upgrade a modest house. Personal loans also build your credit, which helps toward larger purchases in the future.

The Benefits of Personal Loans

In addition to their broad applicability, personal loans come loaded with benefits that distinguish them from other borrowing options. If you have the ability to plan out expenses in advance, personal loans can give you a great deal of financial flexibility.

“Personal loans can be used to fill short-term funding gaps,” explains Rakesh Gupta, director of ARG Finance (Australia). “For example, if you want to purchase a car, but your monthly income cannot support this, spreading the expenditure across a long span of time with a personal loan can be a smart move.”

Unlike credit cards, personal loans come with fixed rates and set payments. You will have no surprises in regards to your payments, and a firm date when the loan gets paid off. This lets you plan your budget in advance and approach the loan with confidence.

Also, personal loans typically have no collateral requirements. Another popular type of loan, the home equity loan, uses the value of your house as a guarantee. With personal loans, you do not have to worry about losing your home should you find yourself unable to pay. You also have plenty of options amongst loan providers, and can comparison shop for favorable rates.

“There are a variety of places you can go for a personal loan,” says Priyanka Prakash, a finance specialist with FitBizLoans.com. “Banks have good rates, but they work slowly. For faster funding, you can consider an online personal loan.”

Personal Loans and Credit Card Debt

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Credit card debt is a frequent reason for people to seek out personal loans. If you have one or more maxed-out cards, or multiple cards with high interest, a personal loan can usually consolidate your debt within a lower rate. This means you only have to budget for one monthly payment, and can save money on interest as you pay off the loan.

“Credit cards can carry interest rates of 15 to 25 percent,” says Andrew Housser, co-CEO of Freedom Financial Network. “A personal debt refinance loan can lower that rate by two to four points.”

For example, the amount paid over 60 months on a $10,000 debt at 20 percent interest would equal nearly $6,000. A personal loan that lowered that interest by four points would save you $1,300 over the same period of time.

With flexibility, ease of receipt and competitive interest rates, personal loans stand as attractive options for prospective borrowers. If credit cards have caught you in a cycle of debt — or if you need to close the gap to meet a large expense — a personal loan might just be the answer.

About the Author

Doug Matus is a freelance writer who frequently contributes to Self Lender.

Written on March 15, 2016

Self Lender is a venture-backed startup that helps people build credit and savings. Comments? Questions? Send us a note at hello@selflender.com.

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