Even with an unsecured personal loan, of course, not making payments on time can be detrimental to your credit rating and severely limit your ability to obtain credit in the future. FICO, the company behind the most widely used credit score, says its payment history is the most important factor in its formula, accounting for 35% of its credit score. You can also consider a personal loan if you need to take out a loan for a fairly short and well-defined period of time. personal loans usually last from 12 to 60 months.
For example, if you are owed a lump sum of money in two years but there is not enough cash flow in the meantime, a two-year personal loan could be a way to close that gap. If you owe a substantial balance on one or more credit cards with high interest rates, taking out a personal loan to pay them off could save you money. For example, as of this writing, the average interest rate on a credit card is 19.49%, while the average rate on a personal loan is 9.41%. That difference should allow you to pay the balance faster and pay less interest in total.
In addition, it is easier to track a single debt obligation and pay it off rather than several. Some types of loans can only be used for a certain purpose. For example, if you apply for a car loan, the only way to use the funds is to buy a vehicle. Personal loans can be used for many purposes, from consolidating debts to paying medical bills.
If you want to finance an important purchase but don't want you to limit yourself to the way you use money, a personal loan can be a good alternative. Check with your lender about approved uses for the loan before you apply. If you have income stability and are sure you can repay what you owe in a timely manner, a personal loan could work for your financial situation. However, it is generally unwise to treat a personal loan as a solution if you are unemployed or have financial difficulties.
Understanding the pros and cons of personal loans is important when looking for a lender and deciding whether to apply for funding. While more creditworthy personal loan applicants may qualify for low APRs, others may find higher rates of up to 36%. Taking out a personal loan and paying it off in a timely manner could help improve your credit score, especially if you have a history of late payments on other debts. While personal loans can be useful in a number of situations, they can also have high interest rates and significant repercussions for your credit rating.
So, if you're facing unexpected auto repair costs or emergency travel needs, it may be possible to get a personal loan. It may be easier to qualify for a secured personal loan and have a somewhat lower interest rate than an unsecured one. But financial experts generally advise against using a personal loan for that beach vacation or the latest flat screen TV. Most personal loans are not only unsecured, which means that the lender does not require collateral, but they also have competitive interest rates and zero fees.
However, if you must take out a loan and your income is stable enough to commit to a few years of monthly payments, a personal loan may be cheaper than many credit cards. If you consolidate credit card debt into a personal loan, you'll need to adjust to higher payments and loan repayment term or default risk. Personal loans often have lower rates than credit cards, so they can help you consolidate your credit card debt and pay less interest on overall debt. In some cases, personal loans can help you pay for unexpected life events or better manage existing debts.
Once you have all the facts, decide if the benefits of a personal loan outweigh the drawbacks before committing. .