At a Glance
Personal loans are a type of debt, but not all debt is bad if you carefully consider your needs and plan for repayment. Many financially responsible borrowers use personal loan funds for a variety of reasons, including improving their credit score. More people are turning to personal loans to help fund events, projects, and other expenses, and there are a number of benefits to doing so.
In this article, you’ll learn:
What is a personal loan?
If you need funds for a large purchase, event, or emergency, you can get a personal loan. Personal loans can be obtained from a bank, credit union, or online lender, and while it is a type of debt and should be borrowed responsibly, there are several uses and benefits that can make them a good option for borrowers, especially those with good or excellent credit scores.
There are four types of personal loans: Unsecured, secured, fixed rate, and adjustable rate. It’s important to research your options and compare lenders to find the best one for your needs.
Learn more: Everything You Need to Know About Personal Loans
Reasons to get a personal loan
Personal loan funds can be used for just about anything. While you should carefully consider your financial situation and needs before taking out a loan, it can be helpful to know what personal loans can be used for. Just a few reasons to get a personal loan include:
- Consolidating debt
- Building credit history
- Completing home improvements/renovations
- Paying off private student loans
- Funding higher education
- Paying medical expenses
- Covering moving costs
- Making a large purchase, like a vacation or vehicle
- Funding a large event, like a wedding
- Covering emergency or unexpected expenses
Learn more: Reasons to Get a Personal Loan
Benefits of getting a personal loan
Because a personal loan can be used for just about anything and there are several options for financing, these can be a great choice for borrowers who need financing. However, it’s important to remember that many of these benefits can depend on your personal situation and factors like your credit score, income, debt-to-income ratio, assets, and more.
Here are a few benefits of getting a personal loan, especially for well-qualified borrowers.
1. Higher borrowing limits than other debt
Personal loan amounts can range from $1,000 to $100,000 depending on the lender, your credit score, debt-to-income ratio, and other factors. While the average loan amount ranges based on credit score ($2,817.03 for less than 560 and $18,812.69 for more than 720), personal loan borrowing limits tend to be higher than credit line or other alternative limits.
2. Lower interest rates
Personal loan interest rates are typically lower than other alternatives, especially credit card interest rates. For example, unsecured personal loan rates can be as low as 2.99%, though most average around 5% or 6% for well-qualified borrowers. On the other hand, many credit card interest rates range between 15% and 25%. For most borrowers, the higher your credit score, the lower the interest rate you’ll qualify for.
3. No collateral required
Most personal loans are unsecured, meaning you do not need to have assets to use as collateral. If you default on a secured loan, you risk losing those assets. If you risk defaulting on an unsecured loan, you could be sent to a collections agency and your credit score may suffer, but you won’t lose that collateral.
4. Easier to track and manage
When you have a personal loan, it will be funded in one lump sum, and you’ll have a fixed monthly payment each month to pay it back. This makes it easier to manage, especially compared to having multiple credit cards with different spending limits, interest rates, payment dates, companies, etc. This makes it easier to know how much of a loan to take out and how much you’ll owe each month.
5. Predictable repayment schedule
Personal loans come with fixed interest rates and fixed repayment terms. This means you’ll owe your payment on the same day each month, and it will be the same amount for the lifetime of the loan. You’ll also be able to easily calculate how much you’ll end up owing in interest, and when the loan will be completely repaid.
This is different from revolving lines of credit, like credit cards. While your payment due date is the same each month, your minimum monthly payment can vary and how much you owe in interest is subject to change depending on your outstanding balance.
6. Longer repayment terms compared to other loans
Personal loan repayment terms can vary, and while the average is two to five years, you can have a term of seven to ten years depending on how much you borrow and how much you want to pay each month. Compared to payday loans and pawn shop loans, which have repayment terms of a few weeks, or credit card debt, which should be repaid in full every month, these longer repayment terms can make having a personal loan more manageable.
7. Builds credit history
Having a personal loan can improve your credit score. First, making payments on time each month helps build your payment history, which makes up 35% of your score. If you’re taking out a personal loan to consolidate debt, this can lower your credit utilization. Having a personal loan also improves your length of credit history and credit mix.
8. Easy to apply
Applying for a personal loan is relatively easy, especially if you prepare ahead of time and gather the appropriate information and documentation. Some information you may need includes bank account information, information about the loan, personal information, and proof of income. The steps to apply include:
- Estimate your need and repayment
- Check your credit score
- Consider your options
- Choose your loan type
- Shop around for the best rates
- Consider ways to increase your chances of approval, like improving your credit score, increasing income, or getting a cosigner.
- Fill out the application, most of which can be easily completed online.
- Accept the loan and start making payments.
Most lenders have the loan application online, and approval can happen in less than 24 hours.
Related: How to Apply for a Personal Loan
9. Fixed interest rates
Fixed interest rates mean the interest rate does not change over time. This makes it easy to budget your monthly payment (because it won’t change) and calculate how much interest you’ll end up paying over the life of the loan.
10. Personal loans can be used for many purposes
As noted above, there are several reasons you can take out a personal loan. A personal loan can be a great option if you have an emergency expense or unexpected cost, are looking to go on vacation or pay for a wedding, need to make some home repairs or pay medical bills, or want to consolidate outstanding debt.
Alternatives to personal loans
There are many alternatives to personal loans depending on your specific needs, though some of them are not recommended due to their high interest rates and other factors.
For example, you may want to consider a debt consolidation loan or balance transfer credit card for consolidating and paying off outstanding debt. A personal line of credit or credit card can be good alternatives for financing, or a home equity loan or home equity line of credit (HELOC) if you own your home. A credit union loan can be explored if you need a smaller loan amount and belong to a credit union.
A few alternatives to avoid due to their potential downsides include payday loans, pawn shop loans, 401(k) loans, and credit card cash advances. Debt settlement can be another option, but as a last resort.
Learn more: Alternatives to Personal Loans
Taking out a personal loan can be a good idea, but it’s important to consider all of your options and do research to find the best for you. Personal loans are great for borrowers with good to excellent credit scores who have a steady income, low debt-to-income ratio, and can fit the payments into their monthly budget. If you won’t qualify for a lower interest rate or can’t afford the monthly payment, it may not be a good idea.
Personal loan interest rates vary based on your credit score, income, debt-to-income ratio, the lender, the loan amount, and other factors. Currently, rates can range from about 3% to 36%, though the average is around 10.6%. The average interest rate based on credit score is:
|Excellent credit (720+)||10.3% – 12.5%|
|Good credit (690 – 719)||13.5% – 15.5%|
|Average credit (630 – 689)||17.8% – 19.9%|
|Bad credit (below 629)||28.5% – 32.0%|
How long it takes to get a personal loan depends on the lender. For example, banks tend to take the longest, followed by credit unions, and online lenders are usually the fastest. In fact, some online lenders approve an application as soon as the same business day, with funding times between one and four days. It’s important to fill out the loan application completely and provide all the requested information and documentation to help the process go faster.
Learn more: How Long Does It Take to Get a Personal Loan