What Is A Personal Loan?
Personal Loans are becoming much more popular as a tool for managing debt. In particular, consumers often seek these types of loans to manage credit card debt. Other common reasons individuals seek out a personal loan may be emergencies which require quick access to money or home repairs that cannot be put off. The biggest factor to consider when looking for a Personal Loan is whether or not it makes financial sense for your given situation. Personal loans often have moderate interest rates. Rates typically range from a low end of about 5% up to about 15% (or higher if depending on your credit situation). Credit Card interest rates are often above 20%. For this reason, consumers may have much to gain by using a personal loan to pay off credit card debt.
One unique aspect with a personal loan is that unlike automobile loans or home mortgages, personal loans are not contingent on some sort of particular purchase. Personal loans can be used for whatever purpose the approved individual would like to use their loan for. Just like any other loan, consumers will be required to make minimum payments throughout the life of their loan and will be charged interest on the balance of their loan.
Considerations When Applying and Accepting A Personal Loan
If you are taking out a loan for reasons like home repairs, medical expenses, or other urgent needs, deciding on a personal loan will primarily be a personal decision based on the urgency of the situation. No one ever wants to be in debt. If at all possible, other options should be considered. Some credit cards provide options like credit loans which may be available at a lower rate than your standard APR. With this said, if your only other option involves dipping in to retirement funds, then a personal loan may be a better idea.
Personal Loan or Borrow From 401k?
Let’s consider the following example. A $10,000 personal loan at an interest rate of 8% over 4 years would cost just under $12,000 once interest is accounted for. Removing $10,000 from a 401k or comparable retirement savings plans could end up costing you well over $50,000. In this circumstance, taking a personal loan is a much smarter option than borrowing from your retirement plan.
It may be tempting to borrow from your own money but you need to account for the years of interest your investment will no longer receive. Even though you will save short term on the interest from the loan, it could still cost you big in the long run.
Personal Loans For Credit Card Debt
Another common reason individuals take out a personal loan is to deal with outstanding credit card debt. Personal loans can be a smart option if you have a substantial balance that you do not have the ability to pay off in the near term. The first consideration one should make is whether they can eliminate their debt quickly without taking out a new loan. If you have savings available to pay off your credit card, this should be the first option to consider. You may want to compare personal loan options if it is unlikely you will be able to pay off high interest credit card debt.
Let’s consider a second scenario. An individual has $10,000 of credit card debt at 20% APR. If this card was paid off in 3 years, you would be paying approximately $375 per month. This would result in about $3,400 dollars in interest. A personal loan at 8% for that same 3 year period could result in a payment of about $300 per month. This loan would result in about $1,250 paid in interest over the life of the loan. In this scenario, the personal loan would save about $70 per month. Over the life of the loan, this would result in over $2,000 in savings.
Finding The Right Personal Loan
There are many popular personal loan options and finding the best one for you will ultimately come down to two key aspects. These are the interest rate and the term of your loan. Depending on your situation, you may be able to pay off your personal loan sooner rather than later which would be an ideal situation for a short term loan (24 months for instance). If you need longer time and lower monthly payments, you may have to opt for a longer term personal loan (60 months). Lenders often have specific loan terms they provide. Consequently, this is the first decision to make and will be solely based on your ability to pay back your loan as fast as possible.
When considering interest rate the process is quite simple. The lower the rate the better. Finding the lowest interest rate is the most important thing to do when you are shopping for your loan once after establishing the term of your repayment period. There are many free sites such as Credit Karma which provide loan options that meet your specific credit profile. It is worth noting that these are based on who they have relationships with so you may not have a comprehensive list if you go this route.
Finding Loans With Your Local Bank or Credit Union
One smart option that many people overlook in the age of the internet is visiting the bank they do business with. Oftentimes banks or credit unions provide these services and if you have an existing account you may even qualify for lower interest rates. Another option is to look for promotional offers as many lending companies provide pre-approval rates without having to endure a hard credit check. You can check your rate for free and then only complete the application with the lending company that you decide to do business with.
Popular Personal Loan Lenders:
- Lending Club – provides peer to peer lending, a pioneer in the personal loan space (more information – Lending Club Personal Loan Review)
- Prosper – free rate check with no credit pull and 3 and 5 year terms available (more information – Prosper Personal Loan Review)
- Discover Personal Loans – fixed rate loans and flexible repayment terms
There are hundreds of banks and financial institutions which offer personal loans. Your loan approval and interest rate will be largely based on your credit score. It is important to always strive to maintain a spotless credit history. Applying for any line of credit with bad credit will make the process much more limited in options and your rates will be much less forgiving. Overall, a personal loans can be a great financial tool when used appropriately but care should be taken to ensure you loan is the right option for you.