banking

 

More people are turning to personal loans for financial relief more than ever. In the last few years, personal
loans have surged to become the fastest growing type of consumer debt.

Taking out a personal loan has become a popular choice for consumers for a lot of different reasons. Read on to discover the advantages of a personal loan and how you can decide if it’s the right option for you.

What is a Personal Loan?

A personal loan is a loan that can be used for just about anything. A personal loan is similar to an auto loan or mortgage in that it’s paid back in monthly installments. There are many differences, though as well.

The amounts you can take out in a loan and the payment terms tend to be smaller and shorter. While an average new car loan is about $31,000 and paid off in 5-6 years, a personal loan can be much less.

Personal loans tend to be anywhere between $200 to $50,000 and paid off within 3-5 years. These are considered to be unsecured loans, meaning that there’s no collateral for the bank to leverage to secure the loan if you should default.

In the case of an auto or home loan, your car or home are used to secure the debt. If you default on your payments, the bank will be able to repossess your car or foreclose on your home to recover its losses.

Top Reasons for Taking Out A Personal Loan

Personal loans offer a lot of flexibility in dealing with debt or upcoming large expenses. They also tend to be a better option than maxing out your credit cards.

Here are the top reasons why you’d consider taking out personal loans for your financial situation.

Pay Off Student Loans

The burden of student loans is one of the most talked about topics related to our economy. Many are saddled with large student loan payments that impact their ability to purchase a home or a car.

You can use a personal loan to refinance a student loan, which gives you more flexibility to do things like plan for the future financially. You can potentially get a lower interest rate with a personal loan, which allows you to pay off your loan faster.

Consolidate Credit Card Debt

Credit card debt in many cases has become unmanageable. Credit cards often have high-interest rates of up to 29.99%, which makes paying off those credit cards a long and painful process.

A personal loan allows you to pay off those credit cards and consolidate the debt into one monthly payment at a lower interest rate.

Bring Your Credit Score Up

If your credit took a hit recently or if you don’t have a credit history at all, taking out a small personal loan could be the way to establish or reestablish a strong credit history.

In both cases, you want to take out smaller loans to start with because you’re going to likely have high-interest rates. That will mean that you’re paying more for the loan over time.

Financing a Big Project

Do you plan on getting married anytime soon? How about taking on a remodeling project? Both are good reasons to take out a personal loan.

If you’re not in a position where you have enough money saved up for either occasion, taking out personal loans can help you bridge the gaps.

Start a Side Hustle

Have you ever dreamed of starting a business, but don’t have the capital to get it going? With a personal loan, you have the ability to get that business off the ground. You’ll need to make sure that you have a business plan in place so you can pay back that loan in a timely fashion.

How to Take Out a Personal Loan

There are many types of personal loans for almost any financial situation. There are loans that are income based loans, where your income is used to determine your ability to pay back the loan.

Most loans, though use your credit score to determine your interest rate and your ability to pay back your loan.

Check Your Credit Score

Before you start to apply for a personal loan, you want to have a clear picture of your financial situation. You already know what your income is, but you need to know what your credit score is, too.

A higher credit score means that you’ll get more favorable terms, like a lower interest rate for your personal loan.

Shop Around for Personal Loans

When you’re taking out personal loans, you’ll want to shop around for the best loan possible. You can start your search at your local bank or shop online.

When you’re shopping for a loan, lenders will need to do a credit check to see what you might qualify for. Make sure that they’re using a soft credit check. If you have too many hard credit pulls on your credit report, it can impact your credit score.

Be sure to look for signs of not so reputable loan companies. Some companies will guarantee your loan no matter what. The reality is that loan companies have to assess your financial situation before making an offer.

Some loan companies will also have fees like prepayment penalties and origination fees. You’ll need to read the fine print on these loans so you know exactly what you’re signing up for.

Get Your Financial Life Back on Track

More and more people are taking out a personal loan as a way to get themselves back on track. They may have had a financial setback or they’re using the loan as a way to improve themselves in some way.

Personal loans offer lower interest rates and can be used for a variety of reasons. That’s why they’re such an attractive financial tool.

Our quest for financial literacy continues as we are more economically challenged. Read this article about a bill the proposes financial literacy classes for high school students.