last year approx114.4 millionAmericans took out personal loans for a variety of reasons. That is about 44.81% of the population. For most people, personal loans are the preferred option when they need financial assistance.
Personal loans are also known as unsecured loans because you don't have to borrow these loans against assets as collateral. With a personal loan, you borrow a fixed amount, which you then pay back over a fixed term. However, the question remains: are personal loans worth it?
You can apply for personal loans from $1000 to $15,000. Some large lenders may even offer loans of up to $25,000. Depending on the lender, you should expect repayment after one to five years.
In this post, we discuss some factors that you should consider before applying for a personal loan. Read on if you're planning on taking out a personal loan to see if it's a good move.
What is a personal loan?
Personal loans belong to a large group of loans known as investment loans. This means that you repay the loan in monthly installments with interest for the entire term. Once you complete your loan payment, the lender closes your account.
That means you have to reapply if you want another personal loan. It's easy to apply for and get a personal loan. The payment terms are also more flexible compared to other types of credit.
However, like any other loan, you need a valid reason before the lender can grant you a personal loan. You should also consider the different loan options and find the one that best suits your financial situation.
Types of Personal Loans
There are many personal loan options that you can consider. These are the few types of personal loans and how they work
1. Unsecured Loans
Unsecured loans are the most common types of personal loans, sometimes even using the term "personal loan" interchangeably with unsecured loans. As explained above, unsecured loans are loans without collateral assets. That means you don't have to borrow the loan against your home, car, or other assets you own.
Since the loan is unsecured, the lender will use yourscredit-worthinessto determine the loan amount for which you qualify. Borrowers with excellent credit can even qualify for loans of up to $100,000. Larger loan amounts have longer and more flexible repayment terms.
2. Secured Loans
Secured loans are the opposite of unsecured loans. This means that you have to take out these loans against your assets as collateral. With such collateral, the lender can seize these assets in case you default on the loan.
Because secured loans are less risky for the lender, it is much easier to get a secured loan than an unsecured one. However, it also means risking your most valuable asset. Secured loans can be an ideal option for people with poor credit.
3. Consolidated Debt Loans
debt consolidationLoans gather all your debts into a single loan that you repay every month. Most people borrowDebt consolidation loan to pay off credit cardDebts. However, you can also use debt consolidation loans to pay off medical bills or other loans.
A consolidated loan reduces the monthly cost of your individual loans. However, this does not mean that you should back up the funds in your accountcredit cardsor borrow more. If you have the right debt discipline, you should consider this type of loan.
4. Personal Line of Credit
This loan gives you access to a line of credit from which you can borrow up to a certain amount. The lender charges you interest based on your outstanding balance. You pay no monthly fees.
These loans are ideal for emergencies and unexpected expenses. While some lenders may require asset protection, most lenders make these loans unsecured.
5. Consigned Loans
Unlike previous loans, co-signed loans involve two or more parties providing a guarantee of payment. A co-signer guarantees loan repayment if you default on the loan. The co-signer, in most cases, is someone with a better credit rating or assets that can serve as collateral.
A co-signed loan can be secured or unsecured. have a co-signerincreases your chances of getting creditof larger amounts. A co-signed loan is also less risky for the lender.
Are personal loans worth it?
There is no easy answer to this question as it depends on your individual situation. However, here are some factors to consider before taking out a personal loan.
Impact on creditworthiness
The firstwhat you probably want to knowis whether the personal loan will affect your credit score. Personal loans do affect your credit score, but to a lesser extent. Also, making regular payments on time can improve your credit score.
Also, most lenders require your credit score as a crucial part of their loan application process. Most lenders refer to this as ahard request. This exhaustive query can easily have a negative impact on your credit score.
Don't rush to get a personal loan until you understand thisInterest charges. Apart fromInterest charges, there are likely other fees to be aware of. Let's see them all in detail.
Interest–The longer your payment period, the more interest you end up paying. Interest rates vary from lender to lender. Better credit entails a lower interest rate, which leads to lower interest rates.
Prepayment Penalties– Sometimes it is not a good idea to pay off your loan early. Some lenders may penalize you for denying them some interest. That is why it is very important to read the fine print before taking out a loan.
origination fees– This is the money that some lenders charge to process your loan. This is usually a minimal amount that you don't have to worry about.
Be sure to calculate all the numbers before applying for the loan. You may have to pay back a much larger amount than you borrowed. If this is the case, you should consider another lender.
Where to get personal loans
Most people get their personal loans from banks. In addition to banks, you can also get your loan from other lenders. For example, you can get a personal loan from credit unions,P2P lenderand other private lenders.
Online lenders have been all the rage lately. you can get onepersonal loan of these onlineLenders if you meet their requirements.proper funding, for example, is popular for its flexible payment terms and lenient qualification criteria.
Before you decide on a lender, review all your options and find the best one. Also, there are many illegitimate lenders online, so check reviews and ratings before paying processing fees. If you meet the credit requirements, getting a personal loan should be a breeze.
Benefits of Personal Loans?
Personal loans seem to be very beneficial, it is not surprising that so many people choose them. Here are some advantages of personal loans.
The loan is repaid in fixed monthly installments. This protects your budget and your financial organization. Stay away from lenders who fluctuate monthly payments.
Competitive interest rates
Due to the large number of lenders, you can choose from lenders with competitive interest rates. If you're borrowing large amounts of around $15,000 or more, the interest rates are even more competitive.
Personal loans allow you to consolidate all your debts into one. This will help you lower your monthly payments andsaves a lot of moneyeverything final.
Flexible payment terms
Some lenders have payment terms of up to five or seven years. You don't mind paying back your loan.
Disadvantages of personal loans
Personal loans are not without disadvantages. Here are some disadvantages of personal loans.
Higher interest rates for lower loan amounts
Interest rates are likely to be much higher if you borrow small amounts. If you are looking for a small loan, you should look elsewhere.
Each month, you must pay the monthly rate that the lender dictates. You cannot pay a lower amount even in difficult times.
Most lenders require you to pay a processing fee in order to approve your loan. You could lose your hard-earned money if the lender is illegitimate.
Penalty for early amortization
You pay a penalty if you repay the loan early. This fee serves to ensure that the lender does not lose interest.
Carefully weigh the pros and cons of a personal loan before committing to one. It might be great for some, but not worth it for others.
The decision is entirely yours
Are personal loans worth it?
Only you can answer for sure. However, we hope this article puts you in a better place to respond. Before you take out a personal loan, you should at least find out about the lender.
Credit is not our only specialty. See the other articles on the site for more information.