One of the biggest advantages to personal loans is that you can use them nearly any way you choose. But because there’s no single use for personal loans, they can impact your finances in many different ways.
For most, a personal loan can help boost their financial health. Taking out a loan is a step people take to help improve their personal finances. This could mean paying off some extra debt faster or making home improvements to get it ready to Airbnb.
Why Would You Get a Personal Loan?
Below are some of the most common reasons people take out personal loans.
- Large Expenses: This is a broad category. But personal loans can help you make a big purchase relatively easily. A personal loan may give you a better interest rate for a boat or financing a funeral. Large expenses are the most common reason people take out personal loans.
- Home Improvement: Sprucing up your home can add value to it when you sell. Or it could let you convert your garage into an extra bedroom to rent out. Personal loans offer a good alternative to home equity loans for small home repairs.
- Debt Consolidation: Personal loans can help you roll all your debts into a single loan. This lets you make one loan payment each month instead of multiple. They may also help you get better interest rates than your existing loans.
- Weddings: Weddings are expensive! With all of the food, drinks, and dancing to pay for, the bill racks up fast. But a personal loan can give you some extra wiggle room in the festivities. This can be a good alternative to using a high interest credit card for paying for a wedding.
Getting a Personal Loan
If you think a personal loan is right for you, do your research! Check interest rates between different lenders and find terms that make sense for your personal situation. This means only borrowing as much money as you can comfortably pay back over a short period of time.
As a good rule of thumb, loans with lower APRs are better. This is because they have the lowest interest rate payments over the life of the loan.
Most lenders will let you check interest rates and loan terms without impacting your credit. So before you borrow, check with a few lenders to compare your options.
Did we mention you can also check with your own bank? (You do have a bank account, right?) In addition to online lenders, your own personal bank may be able to help. Your bank can look at your banking habits and relationship with them to offer you loans.
When a Balance Transfer Card May Make Sense
For debt consolidation, a balance transfer credit card may be a good alternative to personal loans. Don’t worry, taking out a credit card can make sense sometimes!
Balance transfer credit cards have introductory interest rates. These 0% interest rate cards let you borrow money with no interest payments for a set period of time — usually about one to two years. After that, interest rates return to traditional credit card interest rates. Yes, these can be high.
Balance transfers can let you transfer your existing credit card debt into a single credit card. A balance transfer card often lets you transfer between $10,000 and $15,000 debt. This can give you some breathing room as you try to get ahead of your debt payments. You may regret putting flights to Mexico on a credit card from a few years ago, but you don’t have to stay stressed!
But balance transfer cards aren’t always the best option for other types of debt. Personal loans not only let you borrow more money (sometimes as much as $50,000).
Finally, credit cards show up differently on your credit report than personal loans. Credit cards are considered revolving debt. Whereas, personal loans are installment debt.
Let’s explain the difference. Revolving debt is debt that fluctuates from month to month. While you may not put any more debt onto a credit card during a time period, lenders don’t know that. Credit card payments usually vary from month to month. Installment debt on the other hand is predictable. The same payments are made each month until the debt is paid off.
These differences may help you later on when other lenders look at your credit report.
Want to see if a personal loan is a good fit for you? Check out our personal loan tool to check your personal rates without affecting your credit.