If you’re in need of a lump sum of between $1,000 and $50,000 to fund a vacation, a car, a wedding, home improvements or even to cover you for an emergency, a personal loan is one option to consider. What is a benefit of obtaining a personal loan, compared to other financial solutions, you might ask? Learn more in this article.
In this article:
The main benefit of getting a personal loan is that you can spread the cost of something that you wouldn’t otherwise be able to afford, over a set amount of time.
Sometimes, you might not be able to (or may not want to) wait to save up enough money to fund a future purchase. A personal loan will allow you to borrow exactly the amount you need with a fixed, regular repayment that you can afford, helping you to manage your cash flow right now.
Personal loans are often used to consolidate other debts. If you have a few credit cards that on are various or high-interest rates, you might be able to combine them into just one personal loan with a lower rate of interest and more manageable fixed monthly payments.
Showing that you can borrow responsibly through a personal loan can give your credit score a nice boost, providing that you manage your repayments well, taking care to pay them on time, every month.
Check your credit score first – make sure your credit score is in tip-top condition before applying for a personal loan. Doing so will increase the likelihood of being accepted the first time around and will help limit any negative footprints on your credit file that could come from rejections.
Shop around for the lowest interest rates – peer to peer lenders such as Prosper can sometimes offer lower rates than the big banks.
Check affordability – always make sure you can afford the monthly repayments required with a personal loan before you decide to get one. You won’t want to end up not being able to repay your loan, as this can wreak all sorts of havoc with your credit score.
Avoid payday loan providers – they market themselves as being a super-fast solution to your money problems, but the interest rates are usually astronomically high. If you can’t afford your repayments for some reason, you could end up in a very frightening vicious cycle of debt where the amount you owe keeps on getting bigger.
Check out other options – you may find that an alternative way of borrowing money might be better for you, read on for details.
Personal loans are by no means the only way to borrow money. You could also look at getting a credit card, using an overdraft or even borrowing money from friends or family too. Let’s weigh up the pros and cons of these alternative options:
Pros – Credit card borrowing offers you greater flexibility and will give you the advantage of a revolving line of credit, so you can fund purchases whenever you need to.
Cons – The revolving line of credit is not always a good thing, as you may end up getting into more debt than you need to. Usually, interest rates are higher on credit cards than on personal loans, so if you do go down this route, try to get a card with a rate discount. For starters, check out this one by Bank of America which offers 0% Intro Apr on 15 billing cycles for purchases and any balances transferred within the first 60 days. (Read the small print before applying.)
Pros – Providing you’ve been managing your finances well and you’re only looking for a short-term solution, getting an overdraft could be an easy and quick option to set up with your existing bank.
Cons – You can dip into an overdraft when you need to, but it’s not ideal to be overdrawn every month. Banks charge high fees for overdraft along with penalties if you stay negative for too long. Plus, watching your wages disappear into the red every month is a little demotivating.
Overdraft line of credit
Pros – An overdraft line of credit is like a loan attached to your checking account. This option charges you interest on the amount you borrow. It may be possible to borrow up to $10,000 in this way from some banks, such as Santander.
Cons – Overdrafts aren’t generally meant for regular use and it’s not ideal to be overdrawn entirely. Some banks won’t like it if you keep using your overdraft regularly and eventually your account could end up being closed. Transfer fees may also apply as well as interest charges.
Borrowing from friends and family
Pros – If you feel you can ask a friend or family member for a loan, you could benefit from no fees or interest, leaving you in a better situation to repay.
Cons – You may find your financial situation getting in the way of your relationship, should you not be able to pay the loan back. So, it’s essential that you both lay out the terms for a loan beforehand – and that you stick to these terms going forwards.
Before you decide, consider all avenues that are open to you, including whether you do need or want to borrow money in the first place. Remember, a personal loan is a debt that will eventually have to be repaid.
*Disclaimer: facts and figures quoted are correct at the time of publishing.