Should I take out a personal loan? 3 things to consider

Personal loan
The advantages of taking out a personal loan are many.

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As inflation continues to limit consumers’ purchasing power, many people are turning to credit to pay bills and emergencies. But while getting into debt is sometimes the only option, there are ways to limit the amount of interest you end up paying.

One of the best options is to take a Personal loan. Personal loan interest rates are lower than some other forms of credit. And they are a reliable way to cover certain expenses.

If this sounds like something you could benefit from, you can start the process now.

In this article, we explain what a personal loan is and why you might want to get one.

What is a personal loan?

A personal loan is an unsecured loan, which means there is no collateral behind the loan. You can use a personal loan for several different reasons, such as home improvement projects, emergency expenses, or debt consolidation.

Personal loan amounts range from $2,000 to $100,000, depending on the lender, your credit score and other factors. Repayment terms range from two to seven years.

3 reasons why you could take out a personal loan

The recent rise in interest rates has had a slight impact on personal loan interest rates. But if you have excellent credit, you may still qualify for a low rate. Read below to understand some of the best reasons to use a personal loan.

May be cheaper than other types of credit

Many borrowers resort to personal loans because they are often cheaper than using credit card. For example, the average credit card APR in 2022 is 16.17%. But if you have good credit, you might qualify for a personal loan with single-digit rates.

Here’s how much you could save using a personal loan. Let’s say you have a balance of $10,000 on a credit card with an APR of 16%. If you take out a personal loan with an interest rate of 7% and a term of five years, you could save $4,719 in total interest over the life of the loan.

Top lenders offer rates as low as 4.99% APR, but you’ll likely need a credit score of 760 or higher to qualify.

Plus, it’s easy to go through the application process. Some loans are even disbursed within days. Get money in a lump sum once in a while, then pay it back monthly.

Can repay other loans

A personal loan can be more flexible than short-term loans like payday loans and title loans. These loans have fast repayment terms, often in a month or less. However, if you opt for a personal loan, you can opt for a much longer repayment term with more manageable monthly payments.

If you have a large credit card balance, paying it off with a personal loan can also improve your credit. When you have a credit card, the credit bureaus calculate how much credit you are currently using. This is called your credit utilization rate, which is 30% of your credit score.

When you have a large balance on a credit card, you may have a high credit utilization rate which could hurt your credit score. However, if you can pay off that balance with a personal loan, you can improve your credit score while paying less total interest.

Can help you consolidate multiple loans

One of the main reasons consumers take out a personal loan is to consolidate multiple loans into one loan. This strategy allows borrowers to simplify their repayment process.

For example, if you had a balance on three different credit cards, you could pay them off with one personal loan. Then you would only have one monthly payment to worry about.

Having fewer monthly payments to manage could help you avoid late fees and additional interest charges.

There are three main advantages to debt consolidation loans:

  • You can potentially get a low rate. As mentioned above, personal loan rates are generally better than what you would get with a credit card. A debt consolidation loan could help you pay off your debt at a lower cost.
  • This can increase your credit score. After a series of one-time payments on the loan (and assuming you don’t accumulate debt elsewhere), you will begin to improve your credit.
  • There is an end date. With a debt consolidation loan (unlike credit cards), there is a fixed repayment date so the borrower knows exactly when they can stop paying. So even if the debt you have consolidated is significant, you will at least know exactly when it will be eliminated.

This is not an exhaustive list. There are many other benefits to taking out a personal loan, some of which are specific to your personal financial situation.

If you’re considering this unique opportunity, it’s best to speak with a lender to determine what you qualify for and how quickly you can get paid.

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