Personal loans are financing instruments issued by banks or financial services firms that help individuals obtain some extra money for their short-term needs. These loans can be used for multiple purposes including performing home renovations, consolidating multiple debts, or just to fill a temporary budget gap.
While there are many advantages to getting a personal loan, there are also some downsides that you should be aware of before you apply for one.
In the following article, we will take a closer look at the key characteristics of personal loans, their advantages and disadvantages, and some recommendations to get the best ones available.
Types Of Personal Loans You Can Choose From
Personal loans in the United States have been seeing some positive momentum lately, as the outstanding balance of these financing instruments has almost doubled, from $72 billion to $143 billion, from 2015 to early 2019, according to statistics from credit bureau Transunion.
According to the firm, the two most popular uses for personal loans include debt consolidation –a type of loan that will be explained in more detail later in this article– and home improvement.
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The report also highlighted that in the first quarter of 2019 there were more than 21 million active personal loans in the US, with the average debt per borrower of around $8,400.
Although the conditions of these loans vary from one provider to the other, the credit terms usually range from just a few weeks to up to 12 or 24 months, and the interest rate is usually higher than those of traditional consumer loans, such as credit cards.
There are various types of personal loans, including:
- Payday loans. These loans are granted based on the individual’s monthly income and can be approved for very short periods, such as nine or 14 days. They are typically used to pay for living expenses or pending bills while the next paycheck arrives.
- Debt consolidations loans. These personal loans are used to repay other debts with less advantageous conditions or to free up credit limit by consolidating them into one single instrument, usually at a competitive APR.
- Unsecured or secured personal loans. Other forms of personal loans don’t require that the borrower discloses how the funds will be used. In some cases, depending on the borrower’s creditworthiness, the lender can demand certain collateral to back these loans.
These are just some of the types of loans in the market, as innovative lenders and some fintechs have designed multiple alternatives for borrowers around the globe.
Is A Personal Loan A Good Option For You?
Personal loans can be a great tool to cover short-term cash needs, but they are usually more expensive than traditional forms of financing, such as credit cards. Although the interest rate for personal loans varies significantly from one individual to the other based on their creditworthiness, the rates are at least twice as high as those of traditional forms of credit.
According to Transunion’s survey, rates could be as low as 7.25% per year for individuals with a credit score higher than 720, but they could go above 100% for those with a score lower than 600. Moreover, certain providers tend to impose some disadvantageous conditions on these loans, including above-average late payment fees or high closing fees, which increase the cost of borrowing.
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That said, the convenience of personal loans shouldn’t be overlooked. In the past, getting a personal loan often involved going to a physical branch of your local bank and fill a significant amount of paperwork.
Today, most fintech companies rely on technology to provide easy application processes and fast approval times, reducing the time it takes to apply and get approved for a personal loan to as little as one business day. Paperwork has been considerably reduced as well, as users just have to fill a few forms online now.
Tips To Get The Best Personal Loans
#1. Read The Fine Print
By reading the fine print you can be sure that the agreement won’t cause you any financial pain in the near future. Look for excessive late payment fees, APR increases, hidden fees, high closing fees, or refinancing fees.
#2. Shop Around
Personal loans are in high demand lately, especially as unemployment rates have soared around the globe as a result of the pandemic.
For that particular reason, plenty of companies are offering advantageous conditions for their loans to attract first-time borrowers. Take advantage of this trend to shop around to find the best deal out there.
Multiple websites currently offer ratings that qualify the different loan offerings in the US market while also describing the unique conditions of each loan including their APR, whether collateral is required or not, the minimum credit score required, and the maximum length of the credit.
#3. Find A Loan That Suits You
When you are looking at all the available offerings, pick the one that suits your needs the most. For example, if you need a quick cash injection, maybe a payday loan would be the best alternative for you. But if you need to free up your credit card limits; a debt consolidation loan could be the best choice.
Additionally, you should also run your numbers to make sure you can keep up with the installment payments. If after performing those calculations your budget still seems unable to meet the outflows you should either seek a cheaper alternative or you could extend the credit term to reduce the size of the monthly installment.
#4. Stay Informed
Loan providers are constantly bringing new offers to the marketplace and you can stay up to date with what they have to offer by signing up for their newsletters or by giving them permission to send notifications via e-mail or push once a new type of loan or a discounted version of one that already exists is available to consumers.