Only you can decide whether or not taking out a personal loan is the best decision for you to make. To figure out whether or not you would benefit from a personal loan, think about why you’re doing it: is it to pay off multiple debts? Is it to take advantage of a lower interest rate? Determining your exact motivation will help you decide if you should get a personal loan.
You should also know the risks if you cannot keep up with payments. Defaulting on your personal loan can result in damaged credit, bankruptcy, and additional interest and fees. While taking out a personal loan can be risky, it does have plenty of benefits. If done correctly, it can help you to pay off your debt faster while paying less overall interest.
Benefits Of A Personal Loan
Fixed interest rate and monthly payment. A great benefit of taking out a personal loan is the fixed interest rate and monthly payments they offer. Having a set amount each month to pay makes budgeting much easier and reduces the likelihood that you’ll end up in the red for the month.
Low interest rates. If you have good credit, you can receive a personal loan with a very low interest rate. If your credit is less than stellar, you may be stuck with an interest rate that’s unaffordable. Taking steps to improve your credit such as paying down debt and credit card balances can help you afford to take out a personal loan with a much more manageable interest rate.
Consolidated debt. One of the biggest perks of taking out a personal loan to pay off your debts is the ability to combine all of your different debts into one easy payment each month. It also has the added benefit of allowing you to consolidate debts with higher interest rates into a new loan with a lower interest rate. Taking on debt to pay off debt may seem counterintuitive, but the lower interest rate will mean you’ll end up paying less in the long run.
When Not To Get A Personal Loan
If You’re A Student. Federal student loans typically offer much lower fixed interest rates than personal loans, so if you’re a college student a personal loan may not be right for you. Take advantage of federal protections such as deferment and forbearance that federal loans offer; and if you demonstrate financial need you can also qualify for significant financial aid.
You’re falling behind on debt payments. If you can’t afford to stay afloat with the debts that you do have, chances are taking out a personal loan is not going to fix things. Consolidating your debts into one loan, even one with a slightly lower interest rate, is not going to increase your income or reduce your expenses. Before taking out a personal loan, reexamine your finances to see where you can make cuts. You may not need a loan to improve your financial outlook.
You’re remodeling your home. Home equity loans offer much lower interest rates than personal loans because they’re secured, meaning your home acts as collateral. You could also take out a home equity line of credit, which is a loan that works as a line of credit you can borrow against. Either option will offer lower interest rates and a better deal than a personal loan will.
You tend to spend more than you have. Taking a personal loan to pay off credit card debt can be tricky for people who make a habit of spending more than they have. If you pay off your credit card debt with a personal loan only to rack up more credit card debt, you could find yourself in a very bad financial situation very quickly.
You want to splurge on something you can’t afford. Saving up for something like a vacation or a fancy new car is a much better way to manage your finances than borrowing money you don’t have. It may get you the thing you want faster, but the interest you’ll pay will make you regret it in the long run. Being patient will get you there while keeping you financially healthy.
How To Get A Good Deal On A Personal Loan
Improve your credit score. This is the first, most important thing you should do. A quick way to raise your credit score is by lowering your credit utilization, which is the amount of your credit card balance divided by your credit limit. This makes up 30% of your FICO credit score. Having a balance that’s close to your credit limit shows lenders that you have a lot of debt and may not be able to manage it.
Another way to raise your credit score is to be added as an authorized user to a card account that is in good shape. If you have a spouse or a parent who has a good and long payment history, being added to their account will help boost your credit.
Shop around. Research the rates offered by different lenders to see what the best deals are, but be sure to apply and see if you qualify for those rates. The advertised rates may be for people with excellent credit for which you might not qualify. When you find the best rate you qualify for, try using that information to negotiate a lower rate with your local bank or credit union. Very often your bank will be willing to match or beat other lenders’ rates if you’ve been a loyal customer.
Look out for hidden fees. Personal loans with high interest rates typically have fees for early repayment, which may end up costing the same as the interest you would have paid if you’d stuck to the original terms. You may also find a personal loan that offers a low interest rate but tacks on origination or application fees. The best personal loans on the market are free of fees altogether.