Millions of Americans face unprecedented personal finance concerns as the coronavirus pandemic continues to affect unemployment rates months after the first case of COVID-19 was reported in the United States.
The Federal Reserve took steps in March to encourage consumer spending by lowering interest rates to near 0%. Rates have stayed low, and projections suggest that the interest rate will remain near 0% until at least 2023.
If you’re considering a personal loan, now may be a good time to move forward so you can take advantage of low rates. Get started on the application process today.
If you still want to do more research before taking out a personal loan, read on.
What is a personal loan?
Personal loans allow you to borrow funds from a lender to use for any expense. Typically, personal loans may be used for any reason, though some lenders offer specific personal loans, with specific terms, for debt consolidation.
Personal loans differ from mortgage loans and auto loans because you receive the money into your personal bank account and can use the funds to cover a myriad of expenses, from groceries to medical bills, debt payments, vacation, or home repairs. Unlike credit cards or lines of credit, a personal loan has a fixed amount of money you can use.
Credible can help compare personal loan companies (and, hopefully, land you some of the lowest rates for what you're looking for).
Pros of a personal loan
There are several benefits of taking out personal loans, including closing cash flow gaps quickly and helping borrowers pay off their debts in a low-risk way.
Here are some reasons you should take out a personal loan:
- Get cash quickly
- Potential lower costs
- Debt consolidation
- Maximize savings
Get cash quickly: If you need money to help cover expenses, a personal loan can be a great way to get cash quickly. If you have a healthy credit history and a good credit score, you may be able to qualify for interest rates as low as 4.99%.
Potential lower costs: Taking out a personal loan makes the most sense if the loan costs less than other forms of credit. Many consumers opt for a personal loan as an alternative to higher interest rates on a credit card.
Debt consolidation: If you’re struggling to pay off multiple credit cards, a personal loan could consolidate your payments into one, and you could save money with a lower interest rate.
Maximize savings: If you opt for a personal loan, consider choosing a fixed interest rate to maximize your savings. You should only borrow what you can afford to repay. You can maximize the benefits of a personal loan if you take some time to do a bit of research before you apply.
With Credible's free online tools, you can find different term lengths and rates from 4.99% APR in just 2 minutes. Checking rates won't affect your credit and there are no hidden fees.
You can also use their personal loan calculator and to find the best personal loan rates.
Cons of a personal loan
Personal loans may not be the best option for your financial situation.
Here are some things to consider before taking out a personal loan:
- Predatory lending
- Pre-closure charges
- Potential debt cycle
Predatory lending: One drawback of personal loans is that they can be more expensive. While the average personal loan interest rate sits around 9.5%, some predatory lenders charge more than 100% interest rates.
If you have a lower credit score, be careful about applying with online lenders that offer loans to anyone. Use a reputable online tool, like Credible, to compare rates and loan terms from trusted companies.
Pre-closure charges: When you’re applying for a personal loan, look out for pre-closure charges. Some lenders charge an additional fee if you choose to repay the balance of your loan early. Additionally, lenders may also charge a loan origination fee, reducing the amount of cash you get from your loan.
Potential debt cycle: If you use your loan to pay off credit card debt, it’s tempting to start spending on your credit cards again. If you begin spending on your credit cards after using a personal loan to pay them off, you can get stuck into a debt cycle that’s difficult to escape.
While personal loans may have lower interest rates, other considerations could affect your personal finances. Personal loans have a fixed monthly payment and a strict repayment schedule. You must pay off your loan in a set number of months, which could be difficult if you run short on income.
Make sure to explore your personal loan options by visiting Credible to compare rates and lenders. Experienced lenders will also be able to outline any additional fees and monthly payments with you.
How do you get approved for a personal loan?
If you want to take out a personal loan for an emergency fund or cover unexpected expenses, you need to have a healthy credit history and credit score. To secure the best rates, aim to have a score of 660 or more. Additionally, your credit utilization score should be lower than 50%.
Your credit utilization score shows how much available credit you are using. For example, if you have a total of $10,000 available between three credit cards, and you have a combined balance of $5,000 between the three cards, your credit utilization is 50%.
Lenders will also look at your income. If you have a low credit score, you may still qualify for a personal loan if you opt for a secured loan. A secured loan requires you to put cash or another item up as collateral. Alternatively, you could ask a family member or friend with a better credit score to cosign the loan.
Personal loans are a helpful tool to cover expenses you don’t have the cash to cover, but they’re not ideal for every situation. Make sure to review your finances and review your lending options before moving forward.