Early in my marriage, my then-husband and I made two cross-country moves in the space of one year.
By the time we made our second move, we were low on funds and wondering how we could afford it. We didn’t have the savings (both of us were in grad school), and we didn’t want to put such a big expense on a credit card.
My mom suggested talking to our bank about a personal loan to get the money we needed. We were able to get the capital for the move, and do it with a lower interest rate than we would have received with a credit card.
This was the first experience I had with the benefits of personal loans. We don’t think about personal loans very much, but there are advantages to getting one, especially if you have good credit.
What is a personal loan?
A personal loan is usually an unsecured loan, meaning you don’t need to provide collateral when you borrow.
The lender offers you the loan based on your credit and other qualifiers. When you have good credit, you are more likely to be approved for a personal loan and be offered a lower interest rate. You can go to your financial institution and ask for a personal loan, or you can look online for a personal loan instead.
Here are some of the benefits of personal loans:
1. Lower interest rate than most credit cards
Most personal loans come with lower interest rates than credit cards, especially if you have good credit.
It’s not uncommon to pay around 15% APR on a credit card balance. On the other hand, if you have good credit, you might be able to qualify for a personal loan with an APR of about 6%. That’s a big difference, especially if you are making a larger purchase.
If you can’t get a 0% APR introductory rate on a credit card, or if you know that you won’t be able to pay off the loan before the intro rate expires, consider a personal loan.
2. Use for a variety of purchases
Personal loan benefits include the fact that you can use your cash for just about any purchase. It’s possible to use a personal loan for starting a business, buying a car, or renovating your home.
Other loan types may place restrictions on what the funds may be used for. Not so with personal loans, making them a flexible option to fit most situations.
3. Consolidate debt
With the lower interest rate, you can use a personal loan to consolidate high-interest debt. Depending on your situation, you might be able to use one larger personal loan to pay off several smaller debts with high interest, including student loans or credit cards.
Debt consolidation has its own benefits. When you consolidate debt with a personal loan, you can save money on interest and pay off what you owe faster. Not only that, but you also combine several loans in one place under a single umbrella.
This can be very helpful if you struggle to make your payments on time or if you’re having trouble keeping track of each account. Combining everything together can help you better manage your debt repayment plan while saving you money in the long run.
4. Smooth your cash flow
I’ve used personal loans in the past to smooth my cash flow. If I know that a client might not pay on time, a personal loan can come in handy. If you need to bridge a temporary gap, there are benefits of personal loans.
One alternate way to use personal loans is to get a personal line of credit instead of an installment loan. My personal line of credit with my bank comes with a low interest rate, and it’s connected to my checking account.
This makes it easy to provide my finances with a backstop, just in case something happens and a client is late. In short, it means I don’t have to raid my emergency fund. Normally, I access the line of credit to smooth my cash flow and then repay the amount borrowed before any interest is even charged.
Consider whether or not personal loan benefits can work for you and your cash flow situation. Because of the way I have my finances set up, the liquidity of a personal line of credit makes a lot of sense for me.
5. Boost your credit score
If you don’t have diversity in the types of credit you have used, a personal loan can help. One of the benefits of personal loans is that they count toward your credit score in terms of types of accounts you have.
Revolving accounts, like credit cards, represent one type of credit. These accounts show that you can handle loans that aren’t paid off on a regular schedule. Instead, you have a limit, and as long as you make payments to free up room you can keep using the credit.
Installment loans, on the other hand, have a set term. You make the same payment each month. This is a different type of loan, and having it included in your credit report can add a small boost to your score.
It’s never a good idea to get a personal loan just for the sake of trying to boost your score. The improvement won’t be worth the cost. But if the loan is for a planned purchase that you would have put on a credit card otherwise, it can make sense to get a personal loan instead.
Before you borrow
It’s always a good idea to consider other options before you borrow. Even though there are benefits of personal loans, the reality is that you are still paying interest.
Do your best to save up for major purchases, and research other arrangements. Personal loans can be valuable financial tools, but it’s important to avoid getting too far into debt with them.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||Rates (APR)||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|7.39% - 29.99%||$1,000 - $50,000||Visit Upstart|
|5.29% - 14.24%1||$5,000 - $100,000||Visit SoFi|
|8.00% - 25.00%||$5,000 - $35,000||Visit Payoff|
|5.99% - 16.24%2||$5,000 - $50,000||Visit Citizens|
|5.99% - 35.89%||$1,000 - $40,000||Visit LendingClub|
|5.25% - 14.24%||$2,000 - $50,000||Visit Earnest|
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