What is a benefit of obtaining a personal loan?

Do you need extra funds for a special event? Did you run into an emergency situation? Regardless of what you need, insight into what is a benefit of obtaining a personal loan can help you especially in trying times. Though they can come in handy, personal loans also have potential repercussions.

A personal loan can be a powerful tool from handling unexpected costs to consolidating debts. To help you sort out if it’s the right choice, here’s a list of the pros and cons of personal loans. 

9 benefits of using a personal loan

1. Flexible use

Auto loans are tailored to cars, and mortgages are for buying houses. But with most personal loans, you are often free to decide how to use the funds without any restrictions. Whether it’s for consolidating debt, planning a dream wedding, covering home projects, or dealing with unforeseen costs, personal loans can be your solution. 

Since they are versatile, personal loans are a popular alternative to funding major purchases. Though sometimes, certain lenders limit what you can finance with a personal loan. 

2. Lower interest rates than credit cards

Another advantage of personal loans is the lower interest rates they typically offer compared to credit cards. In general, credit card providers charge an average interest of around 20% while personal loans come with rates of about 10%. So, choosing a personal loan can potentially save you more on interest payments. 

While personal loans are often competitive, keep in mind that interest rates and terms still vary per lender and situation. Say you have an excellent credit score. This means you likely qualify for favorable rates.

3. High borrowing limits

Other than competitive interest rates, personal loans tend to have high borrowing limits, too. Based on your lender and circumstance, you may access larger sums usually ranging from $1,000 to $50,000 or more. It’s also possible to borrow even up to $100,000, but remember that you need to meet stricter criteria.

This makes personal loans an attractive choice to fund big expenses, like emergency and medical bills. With this, you can meet substantial financial needs. 

4. No collateral needed

Most of the time, personal loans are unsecured. Meaning you won’t need any asset – such as your home, car, savings account, or CD – to get a loan. And since lenders don’t require collateral, you avoid risking your assets in case you default on your payments. 

Though unsecured personal loans commonly have slightly higher interest rates and stricter eligibility criteria. Even so, the lack of collateral requirements makes personal loans more accessible.

5. Fast funding times

In urgent situations or emergencies where you need quick access to funds, personal loans can make all the difference. Of course, approval and funding times depend on the lender you work with and the requirements. But many lenders offer fast loan processes.

Banks and credit unions generally take a week or more to assess your application and transfer the funds to your bank account. Meanwhile, online lenders tend to be the fastest though it may take up to five business days to claim your loan. 

Even if some lenders take several days, others may offer same-day funding. Remember, many factors affect your loan application process. That said, it’s important to thoroughly research and compare your options before applying for a personal loan. 

6. Consolidate high-interest debt

Do you have multiple loans and credit card balances? Do you struggle to keep track of your due dates, interest rates, and fees? Managing different loans can be overwhelming. But through debt consolidation, you can streamline your payments in one loan. 

Debt consolidation allows you to combine several debts (e.g. credit card balances, student loans, etc.) in a single personal loan. By rolling multiple high-interest debts in one loan, you regain control over your monthly payments. 

Not only does debt consolidation make things convenient, but it may also reduce your overall interest payments. Since personal loans tend to have lower interest, this gives you an opportunity to save more in the long run.

7. Builds your credit 

A personal loan can help build your credit score, too. Even if applying for a loan causes a temporary ding in your score, responsibly handling your repayments positively impacts your credit over time. 

Personal loan lenders report your payment history to any of the three major credit bureaus – Experian, Equifax, and TransUnion. Say you consistently make on-time payments on your loan. This helps you show responsible borrowing behaviors and build a positive credit history. Beyond that, personal loans also add to your credit mix, which is another factor that influences your credit score. 

However, missing payments or defaulting on a personal loan has negative effects on your credit score. So, ensure you manage your loan responsibly.

8. Regular payment schedule

Personal loans have regular payment schedules that set them apart from revolving credit options, like credit cards. Meaning you borrow a fixed amount, agree to a repayment term, and have predictable monthly payments. 

Since you know how much you typically need to pay each month, you can plan your finances and budget with confidence. Plus, you can also manage your debt more efficiently. 

On top of that, you can use personal loan calculators to determine how different loan terms affect your monthly payment. Through this, you can tailor the repayment schedule to your specific financial situation.

9. Flexible repayment terms

You can also choose the ideal loan term that considers your budget and circumstance. Lenders offer different term lengths – often 12 to 60 months for personal loans. At times, some lenders provide extended terms. This allows you to select a loan term that aligns with your goals and ensures a reasonable monthly payment.

Longer loan terms generally make your monthly dues more affordable. Though bear in mind that long terms lead to more interest charges over the life of the loan. 

What are some cons of a personal loan?

1. Interest rates can be higher than alternatives

Personal loan rates aren’t always competitive, so there’s no guarantee that you can get low interest when you apply. Lenders assess your application, so you need to satisfy certain criteria to lock in favorable offers. Based on your lender and situation, you may need to meet credit, income, employment, and debt-to-income ratio requirements. 

With this in mind, interest rates can be higher especially if you have poor credit. Since low credit scores raise concerns for lenders, they may give you higher rates if you don’t meet their credit standards. 

2. More eligibility requirements

An unsecured personal loan usually has stricter eligibility requirements compared to other funding options, like credit cards. So, if you have bad credit or limited credit history, you may have fewer options or struggle to get approved.

If you’re willing to put your asset as collateral, you may opt for a secured loan instead. Your asset may offset your poor credit, so this lessens the risk lenders take. And potentially, you may get lower rates and better terms overall.

3. Potential fees and penalties 

Personal loans tend to come with extra fees and penalties that can increase your total loan. Commonly, you need to pay origination fees, which usually range from 1% to 8% of your loan amount. And if you miss or make a late payment, you may need to pay late payment fees, too. Other times, lenders may also ask for prepayment penalties when you pay your balance earlier. 

It’s important to thoroughly check all fees and penalties associated with your loan. This way, you avoid surprise costs ahead of time. 

4. Credit damage

Though personal loans give you the opportunity to build your credit, it still depends on how you manage your payments. Note that a weak repayment history and a high debt-to-income ratio can significantly decrease your credit score. If you fail to keep up with monthly dues, this then hurts your credit. 

More than that, if you experience multiple loan rejections, your score may also suffer. Lenders do a hard credit check every time you apply for a loan, so application rejections can cause a dip in your score. 

Personal loan alternatives

If you think a personal loan is not for you, you can consider your other options to get funding. 

• Credit cards: In case you don’t have a set amount you need to borrow, credit cards offer a flexible borrowing option. Should you qualify for a 0% APR credit card, you can avoid paying interest by repaying your credit card debt within the promo period. But note that you pay interest on any remaining balance after the period. Then, try to keep your credit utilization ratio below 30% to protect your credit score. 
• Home equity loans: If you have enough equity in your home, a home equity loan can also be an ideal alternative to a personal loan. Equity refers to the amount of your home that you own. Similar to how personal loans work, you get a lump sum and make fixed installment payments. However, a huge downside to this is you risk foreclosure if you default on your loan. 
• Home equity line of credit (HELOC): A HELOC is another option to take advantage of the equity in your home. Somehow similarly to a credit card, a HELOC allows you to withdraw funds as needed. Like a home equity loan, failing to repay your HELOC can lead to foreclosure.

Final thoughts

Personal loans offer numerous benefits that can help you in times of need. However, weigh the pros and cons before taking out a loan, and ensure you plan how to use and pay back the funds. Through this, you can reap the benefits of personal loans and achieve your financial goals.

---

Frequently asked questions