NEWS AND ARTICLES
If you need extra cash to pay for home improvements, finance a wedding or consolidate high-interest debt, you might want to consider a personal loan. Used wisely, an unsecured personal loan can fill a void in your budget without risking your home or other assets.
As with other loans, rates for personal loans hinge on your credit score, income and debt-to-income ratio, and they’re not the right choice for everyone. Consider these pros and cons of personal loans before you make a decision.
What is a personal loan and how does it work?
A personal loan is a type of installment loan that gives you a fixed amount of money, often anywhere from R1000 to R250,000, in one lump sum. Personal loans are usually unsecured, meaning you don’t have to use collateral to secure funds. Repayment terms can range between 6 months and 72 months. Personal loans can be used for almost anything, although specific lenders may impose restrictions on their use.
Applying for a personal loan is similar to applying for a credit card. You’ll need to enter your personal information, your financial information and the details about your desired loan. Before approving you, the lender will run a hard credit check, which may temporarily lower your credit score. If your financial picture and credit score are sufficient for the lender — often, you need a credit score in the mid-600s — the lender will set your interest rate, loan amount and terms. You can with Affordable Loans 4 all to get prequalified for a personal loan.
You’ll receive personal loan funds all at once and begin paying them back immediately. Your payment will be the same amount every month until your loan is paid off: a portion of your principal debt, plus interest charges.
There are both advantages and disadvantages to choosing a personal loan over another financing option. Here are some factors to consider when making your decision.
Personal loans can offer benefits over other types of loans. Below are a few advantages of using this type of financing over other options.
Flexibility and versatility
Some types of loans can only be used for a certain purpose. For example, if you take out a car loan, the only way to use the funds is to purchase a vehicle. Personal loans can be used for many purposes, from consolidating debt to paying off medical bills.
If you want to finance a major purchase but don’t want to be locked into how you use the money, a personal loan can be a good alternative. Check with your lender on the approved uses for the loan before applying.
No collateral requirement
Unsecured personal loans don’t require collateral for you to get approved. This means you don’t have to put your car, home or other asset up as a guarantee that you’ll repay the funds. If you’re unable to repay the loan based on the agreed-upon terms with your lender, you’ll face significant financial consequences. However, you don’t have to worry about losing a home or a car as a direct result.
Easier to manage
One reason some people take out personal loans is to consolidate debt, such as multiple credit card accounts. A personal loan with a single, fixed-rate monthly payment is easier to manage than several credit cards with different interest rates, payment due dates and other variables.
Borrowers who qualify for a personal loan with a lower interest rate than their credit cards can streamline their monthly payments and save money in the process.
Personal loans can be a good option for some, but they are not the right choice in all situations. Here are a few negatives to consider before taking out a personal loan.
Interest rates can be higher than alternatives
Interest rates for personal loans are not always the lowest option. This is especially true for borrowers with poor credit, who might pay higher interest rates than with credit cards.
If you have sufficient equity in your home, you can borrow against it using a home equity loan or a home equity line of credit (HELOC). A home equity loan is an installment loan, while a HELOC works similarly to a credit card. One downside to having a home equity loan or a HELOC is that your home is used as collateral. If you default on the loan, you risk losing your home to foreclosure.
Credit card balance transfer offers are another alternative to personal loans. You can save money with a good balance transfer offer, provided you pay the balance off before the special offer period ends. Our credit card balance transfer calculator will help you see how long it will take to pay off your balance.
Fees and penalties can be high
Personal loans may come with fees and penalties that can drive up the cost of borrowing. The fees, which cover loan processing, can either be rolled into the loan or subtracted from the amount disbursed to the borrower.
Higher payments than credit cards
Credit cards come with small minimum monthly payments and no deadline for paying your balance off in full. Personal loans require a higher fixed monthly payment and have to be paid off by the end of the loan term.
If you consolidate credit card debt into a personal loan, you’ll have to adjust to the higher payments and the loan payoff timeline or risk defaulting.
Can increase debt
Personal loans can be a tool for consolidating debt such as credit card balances, but they do not address the cause of the debt. When you pay your credit cards off with a personal loan, it frees up your available credit limit. For over spenders, this offers an opportunity to rack up more charges rather than free themselves from debt.
Personal loans are an attractive option if you need quick cash; with many lenders, especially those that operate online, funds can be made available in a matter of days. Interest rates can also be low, particularly if you have good credit, making personal loans a good way to consolidate and pay off credit card debt. Other good reasons to use personal loans include paying for emergency expenses or remodeling your home.
However, personal loans are not a good idea for everyone. After all, personal loans are still a form of debt. If you know that you have a habit of overspending, for instance, paying your credit cards off with a personal loan may not make sense if you’ll immediately begin building up a new credit card balance.
You’ll also want to consider a personal loan’s repayment timeline and monthly payments. Before accepting a personal loan, use a personal loan calculator to determine whether or not you can afford the monthly payments for the term you’ll spend paying it off. In some cases, it may make more sense to build up your savings to pay for a large purchase instead of taking out a personal loan and making payments with interest for many years.
Before taking out a personal loan, make a plan for how you’ll use the funds and how you’ll repay them (with interest). Weigh the pros and cons of taking out a personal loan rather than using another financing option. Review alternatives such as a home equity loan, a HELOC or a credit card balance transfer.
Don’t forget to read the fine print, including fees and penalties. Once you have all the data, decide if the benefits of a personal loan outweigh the drawbacks before making a commitment.
Debt consolidation involves paying off multiple debts with a single loan that has one fixed, monthly payment. When you consolidate your debt, you’ll typically take out a loan with a lower interest rate to save money on interest.
The most popular type of debt to consolidate is credit card debt, since it typically has some of the highest interest rates. However, you can also consolidate other types of debt, such as personal loans, payday loans and medical bills.
A debt consolidation loan is a type of personal loan that can help you combine several high-interest debts into a new (hopefully lower-rate) loan. When managed responsibly, a debt consolidation loan can help you save money on interest and potentially get out of debt faster.
With a debt consolidation loan, you’ll apply for a loan for the amount that you owe on your existing debts. Once you’re approved for the loan, you’ll receive the loan funds and use them to pay off your credit cards or other loans. In some cases, the funds can be sent directly to your creditors. From there, you’ll begin making monthly payments on your new loan.
Consolidating your debt can you save money. If you have several credit cards with double-digit interest rates and you qualify for a debt consolidation personal loan at a lower rate, you can save a heap of money in interest and, potentially, fees.
It also simplifies your finances. A debt consolidation loan combines multiple debts into one monthly payment and has a fixed rate and a set repayment term, so your monthly payments stay the same and you know when the debt will be paid off. Credit card rates are variable, so your monthly payments differ depending on your balance, and it can be hard to know when your debts will be paid off.
Additionally, using a consolidation loan to pay off multiple debts, especially credit card accounts, might have a positive impact on your credit score. Credit scoring models place a lot of weight on your credit scoring. When a new consolidation loan has the effect of lowering your credit utilization ratio, your credit score might climb as a result.
Of course, you’ll need to avoid making late payments or charging your credit card balances back up again on your recently paid-off accounts. Otherwise, you could put your credit into a worse position.
All lenders have their own requirements for potential borrowers. A common requirement is a credit score in the mid-600s, but some lenders may also look for a minimum annual income and a low debt-to-income ratio — the portion of your income that goes toward existing debts.
Will a debt consolidation loan hurt my credit score?
Applying for a debt consolidation loan may temporarily hurt your credit score, since the lender will have to do a hard credit check in order to approve you. However, if you keep up with your monthly loan payments, you should see significant improvements in your score. Just ensure that you make on-time payments on your loan; missing payments could damage your credit.