At a Glance
Personal loans can provide quick access to funds in a pinch, but they are not right for everybody. Depending on factors such as interest rates, repayment periods, and more, the decision to take on a personal loan can change.
In this article, learn more about:
What is a personal loan?
For those unfamiliar, a personal loan is simply money that you borrow from a specific lender that is to be repaid over a specified period. This money can be used for any purpose, though there are some lenders who offer loans for certain purposes. Banks, credit unions, and third-party lenders are the typical sources for personal loans, and each have their benefits and drawbacks.
In return for borrowing money from one of these sources, a borrower is charged an interest rate on top of the amount they need to repay. This rate can vary depending on the type of loan and other factors such as the principal amount, agreed upon repayment period, and your credit score. As a high-level summary, your personal loan will have four components:
- Principal Amount: The total amount borrowed up-front
- Interest Rate: The additional percentage you will be charged on top of your principal for borrowing the money
- Repayment Period: The amount of time you will be repaying the loan
- Repayment Amounts: The agreed upon portion of your total repayment you will repay on a monthly basis
When is a personal loan a good idea?
Depending on your financial situation, a personal loan can be an excellent strategy for unexpected expenses. Assuming you can make all repayments on time, here are a few examples of times when taking on a personal loan can be a good idea:
- Your goal is to consolidate credit card debt
- You have a large purchase that you do not have the credit limit for, but can repay the amount
- Home renovations or other refurbishments
- Major financial burdens (such as medical expenses) that you cannot pay up-front out of pocket
As a rule of thumb, never take on a personal loan you are unable to repay. It is also best to avoid using a personal loan for smaller, trivial expenses.
When is a personal loan a bad idea?
When considering the question of “are personal loans bad?,” there are a few scenarios that can help in your decision. Mentioned above, never take on a personal loan you can’t repay or when the interest rate is unreasonably high, as you may be a victim of predatory lending. Beyond this baseline rule, here are a few times a personal loan may not be the best option:
- The debt you are taking on is unnecessary
- Your credit score only qualifies you for a high APR
- The lender you are borrowing from isn’t reputable
- The loan purpose is for discretionary expenses
There are other situations where the answer on whether you should take out a personal loan is no but evaluating whether a personal loan is a good decision should be on a case-by-case basis.
Pros and cons of personal loans
Assuming you decide that a personal loan is the right strategy for you, there are a few pluses and minuses that you need to consider. These factors can help you solidify your decision along with choosing the right lender for your purposes.
Pros for Taking on a Personal Loan
- Personal loans have variable uses
- Repayments for personal loans can be spread out over years
- No collateral needs to be put up against the loan
- Personal loans allow for consolidation of debt
Cons of Taking on a Personal Loan
- Low credit score may result in a higher interest rate
- Extra fees such as origination fees or overdue payment fees are on the table
- Depending on your financial situation, your repayments could be higher than you are capable or willing to pay
How to take a personal loan
Assuming you find a good reason for personal loans in your life, it is crucial to understand how to take a personal loan. This process is not as simple as choosing the first lender you find. Anytime you take a personal loan, ensure you are taking the proper time to evaluate all the options available to you:
- Examine your financial situation and determine exactly how much money you need to ensure you are not taking on additional debt
- Look at your credit score to see if you will qualify for favorable interest rates with different lenders
- Prepare personal and financial information to submit qualification applications to lenders
- Research varying lenders and the interest rates they offer, along with the loan terms
- Choose a lender and accept the offer
- Receive funds and begin repayments
The process of taking on a loan does not end when you receive the funds, but rather only once all the repayments are complete. Be sure to meet all your payments on time and in-full to ensure that your credit score doesn’t take a hit. By following this process, you can make a personal loan an excellent financial decision depending on your situation.
How can I get a small loan instantly?
Banks, credit unions, and third-party lenders are available to provide loans at any time. Depending on the lender, the process of securing funds can take multiple days, whereas other lenders can run quick credit checks to get your funds immediately. Do not rush into any loan offering simply for the prospect of getting the funds right away, as this can be how many people fall into the trap of predatory lending. Be sure the interest rate and repayment schedule you are offered is fair according to your financial situation and the loan size.
Can I get a small personal loan with bad credit?
Personal loans for bad credit do exist. In most cases, though not all, it will be third-party lenders offering these loans rather than banks. When you have poor credit, remember that the interest rate you are offered will be significantly higher than if you had better credit. Due to this, seeking financial support from alternatives to personal loans may be a better strategy depending on your specific financials.