Is It a Good Idea to Take a Personal Loan?

A personal loan is a type of installment credit, meaning you borrow a set amount and repay it along with interest in regular monthly payments over a specified period. You can take a loan for a variety of purposes, including debt consolidation, paying for major purchases, home renovations, medical expenses, or covering unexpected expenses.

How does a personal loan work?

Loan terms typically range from 12 to 60 months, but some lenders offer longer options. Most personal loans are unsecured, that is, you don’t need to provide collateral to secure the loan, though some lenders may offer secured loans.

Same as with credit cards, you need to meet certain eligibility requirements to qualify for a personal loan. Lenders typically look at your credit score, income, credit history, and debt-to-income ratio to determine your eligibility and the terms, such as interest rate, loan amount, and repayment period, they’re willing to offer. You’ll also need to provide documents to verify your identity, income, and address.

Personal loans generally have fixed interest rates, meaning the interest rate remains constant throughout the loan term, which can range from roughly 6% to 36%, depending on your creditworthiness and the lender.

When does getting a personal loan make more sense?

If your score is less than perfect and you owe a substantial balance on one or more high-interest credit cards, taking out a personal loan to pay them off could save you money. Personal loans can have lower interest rates than credit cards and work for debt consolidation. That should allow you to pay off the balance faster and pay less interest overall. Plus, debt consolidation loans can simplify the repayment process, because it’s easier to pay one manageable payment rather than multiple debts from various sources. For example, with the Experian® Personal Loans you can compare the best personal loan offers from multiple lenders and find the one that is right for your situation. Experian’s lending partners offer personal, debt consolidation, and student loans with monthly payments, terms, and APR that best match your credit profile.

However, if you have at least good credit, you might also be able to transfer your balances to a new credit card with a lower interest rate if you qualify.

If you’re planning a major purchase, taking out a personal loan may be cheaper than financing it through the vendor or paying with a credit card. Like any large purchase, financing an expensive event, such as a wedding, may be less expensive if you pay for it with a personal loan rather than a credit card. For instance, the MrFinan platform helps you find banks and other lenders that can offer personal loans for a variety of purposes, such as financing a wedding or covering unexpected expenses.

Moreover, taking out a personal loan and repaying it off promptly can help improve your credit score and your credit mix. Having different types of credit, including revolving and installment credit, and showing that you can manage them responsibly is a positive contribution to improving your credit score.

A personal loan can come in handy to consolidate high-interest debt or to pay for a large purchase, as well as improve your credit profile. Either way, make sure you can afford the monthly payments and that the loan fits your financial goals. It’s essential to compare loan terms, interest rates, and fees from different lenders to find the best deal.

Tags: loans, personal loan