Taking out a personal loan can be a lifesaver for many. With that being said, they do have both pros and cons and it will come down to your own situation to determine whether it is the right move for you.
When it comes to interest rates, you think of a typical 30 year mortgage loan. The interest rate on that has hovered around four percent for a while. When you are talking about a personal loan, you can expect the rate to be doubled. When you refinance your home or take out a home equity line, the bank's risk is lower since your home is collateral. With a personal home, it is a higher risk for the bank, therefore, the higher interest rate.
Because there is no collateral involved, your credit score plays a big role in the interest rate you will be given. If you do not have good credit, you can expect the interest rates to really go up. Some loans can go as high as 35%.
The typical length of personal loans is kept below seven years. This is good since borrowing money over long periods is not financially smart. With that being said, if you plan on borrowing a large sum of money, the payments may be too much for you to pay.
There are more options than your bank when it comes to securing a loan. Credit unions often have lower interest rates and fees for their personal loans. There are also some new players in the marketplace like Prosper and SoFi that offer easy and quick loan approval along with great rates to those with good credit. These types of loans are new to the industry but still worth checking out.
If you find yourself in need of cash due to unexpected bills like a medical emergency or a leaky roof, you may quickly consider using your credit card but that can be very costly. At the same time, you do not have time to look into taking out a loan on your home. This is where a personal loan can come in handy. The funds are usually accessible within two weeks of applying which is not as fast but may make more financial sense.
In an effort to consolidate the debt, student loans, credit card balances and car loans are the typical reasons someone takes out a personal loan.. By doing this, you might be able to get a lower interest rate and you get the benefit of having only one bill to pay each month.
When it comes to refinancing a student loan many people are talked into rolling that debt into a personal loan. Prior to signing off on that, make sure you compare the fine print of your old loan to your new loan. In certain cases, with a persona loan, you could be losing certain federal benefits like service member benefits or income based repayment for federal loans.
If you're carrying some debt it may make sense to try and seek out a card with a lower interest rate. Before you think about moving on to a personal loan, do some comparison shopping. You may qualify for one of the 0% balance transfer cards. These extend up to 21 months with no interest. Another solution may be to withdraw money from your retirement savings for a short period, specifically if you have a Roth IRA. Using your retirement account to pay down high interest debt can be a smart move. You just want to make certain you pay back the money and that you are getting favorable terms on the loan.
Certain lenders will attempt to add on an insurance policy or other additional expenses when it comes to closing time for the loan. An insurance policy may or may not be something you want for your loved ones should something unfortunate occur. Do your research and never go with a company that tells you it is a requirement of your loan. Also check to see what type of method they use to calculate the interest (i.e. pre-compute) and if there are any penalties for prepayment. Both of these scenarios will be unfavorable if you pay back the loan ahead of time.
Personal loans can be nice since the lender does not require you disclose the reason you are taking out the loan. With that being said, there are certain things you should not take a personal loan out to pay for. These probably will seem obvious but vacations, your girlfriends engagement ring, a new wardrobe, gambling the list can go on.