A personal loan can be a great way to get a quick cash infusion when you need it, but there are a few important factors to consider. While they may not always the best option for everyone as they can also come with higher than expected interest rates, but by reviewing the entire terms and conditions before locking in on an application, a personal loan can actually rid yourself of your current debt by paying off the credit card balance with terms lower than the current interest rate that could be upwards of 16% APR, and helping to secure a more manageable monthly payment to lose the balance in a matter of a few years instead of decades.
Credit Score Matters
Because a personal loan is a type of unsecured loan, your credit score matters. Since your credit score if sort of the first impression with a potential lender, if you have less than stellar credit, expect to see a higher interest rate or be outright denied for a personal loan. Poor credit loans can result in an annual APR of 36%, which is an absurd amount of money to repay.
When you see low-interest rates advertised in the media, that is tied to the mortgage and housing market. Personal loan interest rates will be much higher, depending on the financial institution. Banks tend to charge more for unsecured loans because there is no collateral involved. Mortgage and car loans have your house and car tied up as collateral, meaning the bank can offer lower interest rates. Always compare your options when applying for a personal loan to make sure you get the best rate.
Personal loans are designed to be short-term cash infusions for a variety of projects in your life. You should not rely on them as a long-term funding mechanism since the payments could quickly become more than you can handle. Think twice before accepting a personal loan for a home remodel or any project that may be extended beyond your expectations.
When it comes to choosing a personal loan, banks are not the only option. Non-profits and credit unions often feature lower rates and fees than traditional banks. There are even some new crowdfunding marketplace vendors like Prosper and LendingClub. These sites offer personal loans backed by a myriad of investors, rather than a single financial entity. The interest rate is dependent upon your credit score, length of the loan, and several other factors.
One of the areas where personal loans make the most sense is debt consolidation. Most people use them to consolidate their credit card balances, student loan debt, and car loans under one payment and interest rate. Consolidating debt in this way saves you money in the long run on interest.
Be Careful When Refinancing Debt
One factor to be aware of when refinancing student loan debt into personal loans is loan-specific protections. If you have student loans, you could be signing away certain federal benefits like income-driven repayment systems if you refinance. Be aware of this type of re-arrangement if you want to look into consolidating all of your debt, including student loans.