When it comes to borrowing money, one option is to reach for a credit card. However, there are many situations where a card just won’t cut it—like if you need to borrow above your credit card limit, or you’re concerned about variable interest rates, or you’d simply prefer an alternative way to cover a one-time expense.
In all these cases, a personal loan can be a good option. Here’s a quick guide on how to utilize personal loans.
What Is a Personal Loan?
Taking out a personal loan means borrowing money from a lender, which you agree to pay back with interest. A personal loan usually comes with a fixed interest rate and a specific repayment term. While there’s no specific number attached to a personal loan, most people borrow somewhere between $1,000 and $50,000.
Common Uses for a Personal Loan
The most common reasons for taking out a person loan include home improvements or repair, travel costs, big purchases such as furniture or recreational equipment, or to pay for education expenses. On the other hand, some borrowers will utilize a personal loan to consolidate debt. This means taking out a personal loan with a good interest rate, and using it to pay off credit card debt or other loans. Consolidating debt can help you streamline monthly payments and potentially reduce your overall interest costs.
Benefits of a Personal Loan
Compared to a loan with a specific intent, such as a mortgage or car loan, a personal loan offers versatility. You can use the money borrowed for whatever purpose you need, whether it’s medical expenses or to fund a big family vacation. In addition, a personal loan comes with a set interest rate and fixed repayment term, which can be helpful in terms of financial planning, and for borrowers who are concerned about a credit card’s variable interest rate. The amount of money available through a personal loan is another benefit—enabling borrowers to access a potentially large sum of cash relatively quickly, without the concern of a credit card limit. This is especially useful in an urgent situation, such as repairing a roof or paying for auto work.
Of course, it’s important to remember that how much you qualify to borrow will depend on your individual credit history. As always, read the fine print carefully, thoroughly check on loan terms and interest rates, and be wary of private lenders offering quick access to high-value loans; especially if your credit score isn’t very strong. If a personal loan looks too good to be true, it probably is.
The Question of Collateral
A personal loan is unsecured, unlike a mortgage or auto loan. In other words, you’re not holding on to any specific collateral which the lender can take back if you’re unable to pay your loan. Unsecured loans generally come with higher interest rates than secured loans. On the other hand, it’s sometimes possible to introduce collateral into the equation, in order to boost your chances of being approved for a personal loan. A car, or cash in a savings account, are two examples of possible collateral—but once again, act with caution if you’re a borrower with lower-than-average credit. You don’t want to get involved with an unscrupulous lender and end up losing your collateral if you can’t pay back the loan.
Who Qualifies?
Like any loan, your chances of qualifying for a personal loan and getting a low interest rate depend on your credit history. With a higher credit score, you’re more likely to be approved and you can borrow a higher amount. If your credit history isn’t top-notch, getting a co-signer could help—which means that if you’re not able to pay back your loan as per the terms agreed, your co-signer would be legally required to help. If you apply for a personal loan and don’t qualify, your lender can tell you why; in fact, you have a legal right to know! So feel free to ask your lender a few questions. This can help you to understand more about your credit situation and boost your chances of getting approved next time.
To learn more about personal loans from HUECU, visit huecu.org/personal-loans
