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MinDof/Shutterstock August 08, 2022 Veneta Lusk is a contributing writer for Bankrate. Veneta writes about personal loans. Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our loans reporters and editors focus on the points consumers care about most — the different types of lending options, the best rates, the best lenders, how to pay off debt and more — so you can feel confident when investing your money. Bankrate logo Editorial integrity
Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Key Principles
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Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. If you need extra cash to pay for , finance a wedding or , you might want to consider a personal loan. Used wisely, an unsecured can fill a void in your budget without risking your home or other assets. As with other loans, rates for personal loans hinge on your credit score, income and debt-to-income ratio, and they’re not the right choice for everyone. Consider these pros and cons of personal loans before you make a decision. What a personal loan is and how it works
A personal loan is a type of that gives you a fixed amount of money, often anywhere from $1,000 to $50,000, in one lump sum. Personal loans are usually unsecured, meaning you don’t have to use collateral to secure funds. Repayment terms can range between one and 10 years. Personal loans can be used for almost anything, although specific lenders may impose restrictions on their use. Interest rates on personal loans are fixed, so your interest rate will not change while you repay your loan. Applying for a personal loan is similar to applying for a credit card. You’ll need to enter your personal information, your financial information and the details about your desired loan. Before approving you, the lender will run a hard credit check, which may temporarily lower your credit score. If your financial picture and credit score are sufficient for the lender — often, you need a credit score in the mid-600s — the lender will set your interest rate, loan amount and terms. You can sign up for a to get prequalified for a personal loan in under 2 minutes. You’ll receive personal loan funds all at once and begin paying them back immediately. Your payment will be the same amount every month until your loan is paid off: a portion of your principal, plus interest charges. Pros of personal loans
Personal loans can offer benefits over other types of loans. Below are a few advantages of using this type of financing over other options. One lump sum
Because you get the loan payment all at once, it can be easier to make a large purchase, consolidate debt or otherwise use the loan all at once. Plus, you’ll get a fixed interest rate and predictable monthly payment, making the loan easier to manage. Fast funding times
Personal loans generally have fast approval times and payment times, making them useful for emergencies or other situations where you need money quickly. Some personal loan lenders can deposit the loan proceeds to your bank account as soon as the next business day. No collateral requirement
don’t require collateral for you to get approved. This means you don’t have to put your car, home or another asset up as a guarantee that you’ll repay the funds. If you cannot repay the loan based on the agreed-upon terms with your lender, you’ll face significant financial and credit consequences. But unlike a secured personal loan, you don’t have to worry about losing a home or a car as a direct result. Lower interest rates
Personal loans often come with lower interest rates than credit cards. As of July 2022, the average personal loan rate was 10.28 percent, while the average was 16.80 percent. Consumers with excellent credit history can qualify for personal loan rates of around 10.3 percent to 12.5 percent. You may also qualify for a higher loan amount than the limit on your credit cards. Flexibility and versatility
Some loans can only be used for a certain purpose. For example, purchasing a vehicle is the only way to use the funds if you take out a car loan. Personal loans can be used for many purposes, from consolidating debt to paying medical bills. A personal loan can be a good alternative if you want to finance a major purchase but don’t want to be locked into how you use the money. Check with your lender on the approved uses for the loan before applying. Extended loan terms
Unlike short-term loans like payday loans and others that charge high interest rates, personal loans range from 2-10 years, depending on the lender. Consequently, you’ll get a reasonable monthly payment and ample time to repay what you borrow. Easier to manage
Some people take out personal loans to consolidate debt, such as multiple credit card accounts. A personal loan with a single, fixed-rate monthly payment is easier to manage than several credit cards with different interest rates, payment due dates and other variables. Borrowers who qualify for a personal loan with a lower interest rate than their credit cards can streamline their monthly payments and save money. Cons of personal loans
Personal loans can be a good option for some, but they are not the right choice in all situations. Here are a few negatives to consider before taking out a personal loan. Interest rates can be higher than alternatives
Interest rates for personal loans are not always the lowest option. This is especially true for borrowers with poor credit, who might pay higher interest rates than credit cards or a secured loan requiring collateral. More eligibility requirements
Personal loans can have more strict requirements than other types of funding options. If you have poor credit or a short financial history, fewer lenders will be available to you. Furthermore, some lenders don’t allow co-signers, which can be used to strengthen your approval odds if you have minimal credit history or your credit score is low. Fees and penalties can be high
Personal loans may come with fees and penalties that can drive up the cost of borrowing. Some loans come with origination fees of 1 percent to 6 percent of the loan amount. The fees, which cover loan processing, can either be rolled into the loan or subtracted from the amount disbursed to the borrower. Some lenders charge prepayment penalties if you pay the balance off before the end of your loan term. Before applying, review all fees and penalties of any personal loans you are considering. Additional monthly payment
With a personal loan, you add another monthly payment. If you are not careful, a personal loan can lead to loan term issues with your budget if it’s not accounted for when you take out the loan and making the monthly payment causes you to overdraw your account and send your budget into the red. Increased debt load
Personal loans can be a tool for consolidating debt such as credit card balances, but they do not address the cause of the debt. Paying your credit cards off with a personal loan frees up your available credit limit. This allows overspenders to rack up more charges rather than free themselves from debt. Higher payments than credit cards
Credit cards come with small minimum monthly payments and no deadline for paying your balance off in full. Personal loans require a higher fixed monthly payment and must be paid off by the end of the loan term. If you consolidate credit card debt into a personal loan, you’ll have to adjust to the higher payments and the loan payoff timeline or risk defaulting. How to decide if a personal loan is right for you
Personal loans are an attractive option if you need quick cash. Here’s how to discern whether a personal loan might make sense for your situation: You need the funds quickly. With many lenders, especially those that operate online, funds can be made available in a matter of days. You have a strong credit score. The lowest interest rates are reserved for borrowers who have good credit. You want to pay off high-interest debt. Personal loans are a good way to consolidate and pay off costly credit card debt. You’ll use the funds toward necessary expenses. Other good include paying for emergency expenses or remodeling your home. However, personal loans are not a good idea for everyone. After all, personal loans are still a form of debt. Below are a few reasons a personal loan might not be right for you: You don’t have a viable purpose for the funds. It can be tempting to take out a loan to have extra funds on hand. But if you don’t have a plan for how the funds will be used, you risk spending money on and paying unnecessary interest on items that are not essential. You have a habit of overspending. Paying your credit cards off with a personal loan may not make sense if you’ll immediately begin building up a new credit card balance. You can’t afford the monthly payments. Consider a personal loan’s repayment timeline and monthly payments. Use a to determine whether or not you can afford the monthly payments for the term you’ll spend paying it off. You don’t need the money urgently. It might make sense to build up your savings to pay for a large purchase instead of taking out a personal loan and making payments with interest for many years. Alternatives to personal loans
There are instances where a personal loan may not be the most sensible option. If you have sufficient equity in your home, you can borrow against it using a or a (HELOC). A home equity loan is an installment loan, while a HELOC works similarly to a credit card. One downside to having a home equity loan or a HELOC is that your home is used as collateral. If you default on the loan, you risk losing your home to foreclosure. Credit card balance transfer offers are another alternative to personal loans. You can save money with a good , provided you pay the balance off before the special offer period ends. Our will help you see how long it will take to pay off your balance. If your financial shortfalls are the result of overspending, a realistic spending plan is a more feasible option. Otherwise, you risk racking up an excessive amount of debt that could take some time to get rid of. Bottom line
Before taking out a personal loan, make a plan for how you’ll use the funds and how you’ll repay them (with interest). Weigh the pros and cons of taking out a personal loan rather than using another financing option. Review alternatives such as a home equity loan, a HELOC or a credit card balance transfer. Use a r to help you determine the best borrowing option for you. If you’re considering a personal loan, get quotes from several lenders to compare interest rates and loan terms. Don’t forget to read the fine print, including fees and penalties. Once you have all the data, decide if the benefits of a personal loan outweigh the drawbacks before making a commitment. Learn more
SHARE: Veneta Lusk is a contributing writer for Bankrate. Veneta writes about personal loans. Aylea Wilkins is an editor specializing in personal and home equity loans. She has previously worked for Bankrate editing content about auto, home and life insurance. She has been editing professionally for nearly a decade in a variety of fields with a primary focus on helping people make financial and purchasing decisions with confidence by providing clear and unbiased information.