Did you know that personal loans are the fastest growing consumer lending product? More and more Americans are exploring personal loan options from online lenders, thanks to easier and faster application processes that help consumers find competitive rates and flexible terms.
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When it comes to borrowing money, people commonly think of a home mortgage or an auto loan. A personal loan is unique in that it’s typically a form of unsecured debt, meaning it is not tied to an asset that a debtor can claim as collateral. A personal loan also has an advantage over a credit card in that the interest does not compound (i.e., interest on interest), and is instead a fixed rate established at the onset of the loan approval process.
Still, just because personal loans have certain benefits, doesn’t mean they are intended for everybody or every financing situation. Here are some reasons why it may — and may not — be prudent to get a personal loan.
When it May Make Sense to Get a Personal Loan
Perhaps one of the most popular (if not, “the” most popular) uses for a personal loan is to consolidate or refinance high-interest debt, most commonly credit card debt. Consumers who are plagued by either one or multiple high-interest credit card balances can use a personal loan to pay off their debt, and then repay the amount on their own terms (i.e., the repayment period),potentially at a lower interest rate, with one easy monthly payment per month.
For consumers looking to make big purchases, whether it’s a home improvement project or paying for a wedding, a personal loan can also come in handy. While the cost may exceed a credit card’s limit, or simply cause a person to be overwhelmed by compounding high-interest, a personal loan allows a borrower to stretch their payments for as long as seven years in some cases, at a locked-in, fixed interest rate.
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When it May (Not) Make Sense to Get a Personal Loan
In some instances, it may make sense to use a personal loan to pay off mounting medical bills, especially when they are in risk of going to collections. However, it’s important to exhaust all options with your medical provider and/or insurer, to ensure that no errors were made, and to see if there are any deferment, forgiveness, or other relief options available. In the other words, it’s worth it to see if you can pay off your medical bills interest fee or at a reduced cost, before pursuing a personal loan.
Furthermore, a personal loan may not be ideal for someone looking to reap the rewards and benefits of a credit card. While interest is normally higher on a credit card, a responsible user who pays their balance in full every month will pay zero in interest. It doesn’t matter how on time you are with monthly payments; interest and fees (i.e., APR) are already baked into a personal loan’s repayment plan.
Furthermore, while a personal loan may be advantageous for refinancing debt from a high-interest credit card, the same may not be true for student loan debt. In fact, many lenders forbid personal loans from being used to pay off student loans. In these instances, a consumer may want to consider student loan refinancing options, in order to obtain a better interest rate and/or consolidate multiple loans.
In life, different financial situations call for different financial products. While there isn’t one option to meet every unique need, a personal loan is a versatile tool that can accommodate a multitude of purposes, whether it’s consolidating debt or making a large purchase.
Interested in seeing what your options are? Let Fiona match you with personalized loan offers today!