If you need extra cash to pay for home improvements , finance a wedding or consolidate high-interest debt , you might want to consider a personal loan. Used wisely, an unsecured personal loan can fill a void in your budget without risking your home or other assets. Consider these pros and cons of personal loans before you make a decision.
Repayment terms can range between one and 10 years. Personal loans can be used for almost anything, although specific lenders may impose restrictions on their use. Interest rates on personal loans are fixed, so your interest rate will not change while you repay your loan. Applying for a personal loan is similar to applying for a credit card. Before approving you, the lender will run a hard credit check, which may temporarily lower your credit score. If your financial picture and credit score are sufficient for the lender — often, you need a credit score in the mids — the lender will set your interest rate, loan amount and terms.
You can sign up for a Bankrate account to get prequalified for a personal loan in under 2 minutes. Your payment will be the same amount every month until your loan is paid off: a portion of your principal, plus interest charges.
There are both advantages and disadvantages to choosing a personal loan over another financing option. Here are some factors to consider when making your decision. Personal loans can offer benefits over other types of loans. Below are a few advantages of using this type of financing over other options. Some types of loans can only be used for a certain purpose. For example, if you take out a car loan, the only way to use the funds is to purchase a vehicle. Personal loans can be used for many purposes, from consolidating debt to paying off medical bills.
Check with your lender on the approved uses for the loan before applying. Personal loans often come with lower interest rates than credit cards. As of February , the average personal loan rate was Consumers with excellent credit history can qualify for personal loan rates in the range of 6 percent to 8 percent.
You may also qualify for a higher loan amount than the limit on your credit cards. One reason some people take out personal loans is to consolidate debt, such as multiple credit card accounts. A personal loan with a single, fixed-rate monthly payment is easier to manage than several credit cards with different interest rates, payment due dates and other variables.
Borrowers who qualify for a personal loan with a lower interest rate than their credit cards can streamline their monthly payments and save money in the process. This applies to all credit agreements made in person, online or over the phone.
You might be charged interest for the period you had the credit — any extra fees have to be refunded. Just over half of people who apply for, and are given, a loan should get this rate or better. But this means up to half pay more. If your credit rating is less than perfect, you might be accepted for a loan but charged a much higher rate of interest. To find out how much your loan could cost, use our Loan calculator. MoneyHelper is the new, easy way to get clear, free, impartial help for all your money and pension choices.
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The number of people with personal loans has increased in recent years from 15 million to more than 20 million, according to TransUnion. Why are personal loans appealing to so many? Personal loans are a type of installment loan. Search Icon Click here to search Search For. Credit Cards Top Picks. Banks Top Picks. Looking for a place to park your cash? Brokers Top Broker Picks. Robo Advisor and Crypto Picks. Mortgages Top Picks.
Insurances Auto Insurance. Loans Top Picks. Thinking about taking out a loan? Knowledge Knowledge Section. Recent Articles. The Ascent Best Personal Loans. How Do Personal Loans Work? Here's how personal loans work. Jump ahead On this page: What is a personal loan and how does it work? Where can you get a personal loan? How does a personal loan impact your credit score? How to choose a personal loan. What is a personal loan and how does it work? For example, you can use a personal loan to: Buy a car Cover rent and groceries while you're unemployed Pay off credit card debt Pay for medical bills Take a vacation Buy a boat Get braces for yourself or your child Cover other expenses, bills, or purchases.
Types of personal loans While all personal loans are in the same general category, there are some sub-categories you should know: Personal loans for good credit -- Many personal lenders focus specifically on "prime" borrowers -- that is, consumers with strong credit histories. Personal loans for bad credit -- There are some companies that have personal loan products designed for borrowers with sub-optimal credit.
Personal loans for debt consolidation -- These loans allow you to combine or "consolidate" multiple debt payments credit cards, auto loan, etc.
A debt consolidation loan usually has a lower interest rate, too, which means you'll probably have a lower monthly payment. Medical loans -- A medical loan is generally used to pay for healthcare costs.
Renovation loans -- These types of loans can help fund home improvements, like installing a pool, redoing a bathroom or kitchen, or finishing a basement. These loans are smaller and meant to help you pay the bills during a short period of unemployment.
Learn more about different loan types Bad credit loans. COVID hardship loans. Debt consolidation loans. How to choose a personal loan If you're in the process of looking for a personal loan, there are a few things you'll need to pay attention to. What you'll need Before you shop around for a personal loan, there are a few concepts you should be familiar with in order to make the best decision for your financial situation. Your credit score and monthly income Read through each lender's minimum credit score requirements to make sure you qualify before applying.
Details of the loan you want How much you want to borrow and how long you want to take to pay it off are two of the most important details you'll need to know before selecting a loan. Here are some things to keep in mind: Interest rate. This is arguably the most important feature to pay attention to, as it's the main determinant of how much your loan costs you over time. You want to secure the lowest interest rate possible. Pay particular attention to annual percentage rates, or APRs, which include the loan's interest rate as well as origination charges if applicable.
Read more: What are the best low-interest personal loans? Loan term.
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