6 Ways a Personal Loan Can Benefit You

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Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

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You’re probably aware of personal loans, which you can get from a bank or other financial institution. They traditionally come unsecured, meaning you don’t need to back the loan with collateral to get the funds. What makes them different from other loans, such as a mortgage or a car loan, is that you can use the proceeds from the loan for variety of purposes.

Personal loans are still a relatively uncommon type of financing. Only 1 percent of American families applied for personal or family loans in 2017, and personal loans comprise 1.5 percent of outstanding consumer debt, according to data from LendingTree, which owns Student Loan Hero. Many people are more familiar with applying for a car loan or getting a new credit card.

Personal loans are gaining in popularity, however, for many reasons. They may even be right for you. Here’s a look at the various benefits of a personal loan.

6 ways you may benefit from a personal loan

  1. Build or support your credit score
  2. Pay for planned expenses with a lower interest rate
  3. Refinance your high interest debt with a lower interest personal loan
  4. Consolidate multiple debts
  5. Know when you will pay off your loan
  6. Borrow money without risking your assets

1. Build or support your credit score

Ten percent of your credit score is based on your “credit mix,” or the different types of credit you have, such as credit cards, installment loans, and finance company accounts. You can only raise your score so far, for example, by using just credit cards — no matter how faithfully you pay them and keep your balances low. By adding another type of credit, you may improve your credit mix and potentially raise your score.

Be aware that taking out a personal loan may cause your credit score to drop a few points in the beginning. Any time you apply for a loan or credit, the “recent inquiry” on your credit history may cause a small, temporary ding to your score. However, unless you are on the edge of a credit score category and you need to have your score at its best right this minute, this is generally nothing to worry about.

2. Pay for planned expenses with a lower interest rate

Many credit cards carry relatively high interest rates, especially after any low- or no-interest introductory ends — that can cost you a lot of money in the long run.

If you need money for some purpose — like repairing your car, buying new tires, paying for a wedding or taking a trip — try to find a source of money with the lowest rate possible. Even a small savings in your interest rate can save you a substantial amount in interest expense over the life of your loan.

Take a look at how different interest rates can affect the total amount you pay on a $5,000 balance:

Loan Balance Interest Rate Term in Years Monthly Payment Total Interest Expense Total Balance Paid
$5,000 18% 5 $127 $2,618 $7,618
$5,000 15% 5 $119 $2,137 $7,137
$5,000 8% 5 $101 $1,083 $6,083
$5,000 6% 5 $97 $800 $5,800

If you have a good credit score, you may qualify for a competitive interest rate on a personal loan. You can use our personal loan calculator to see what your payments and interest expense could be on a personal loan. Be aware that if your credit score is lower, you may not qualify for a low interest personal loan.

3. Refinance your high interest debt with a lower interest personal loan

If you have high interest debt (a car loan you got before you improved your credit score, or a high interest credit card balance, for example), consider paying off that high interest debt as quickly as you possibly can. If you can’t pay with cash, you may be able to take out a personal loan at a lower rate to pay off your high interest debt.

With less money going to interest expense every month, you’ll make much faster progress paying off your balance.

4. Consolidate multiple debts

What if you’re spread thin with too many debts — several credit cards and a couple of medical bills, for example? Trying to pay the minimum amounts on more than a few debts can be frustrating, and it’s easy to miss one and rack up even more in interest expense and penalties.

Managing debt is the most common reason people take out personal loans. By taking out one personal loan to pay off several debts, you’ve consolidated your bill paying nightmare into one payment per month. You know how much it’ll be, and you don’t have to decide which bill to pay. Your minimum payment on one consolidated debt is likely to be less than your total minimum payments on a raft of smaller debts, too.

5. Know when you will pay off your loan

If you’ve been trying to pay off a credit card or similar debt, and your balance doesn’t seem to go down — or it actually goes up — you may do better with the structured loan payment plan a personal loan can offer. With a fixed rate and loan term, your monthly payments will be predictable compared to the payments on a variable rate debt.

If you’re considering refinancing or consolidating debt, you can see how a new rate and term will affect your overall costs with this calculator. You can also explore how a shorter or longer term will affect your monthly payments and overall costs of borrowing.

6. Borrow money without risking your assets

Not all personal loans are unsecured, but many are. You may prefer to take out a loan that is not attached to your house, car, or other assets. In addition, using your house as collateral is less attractive under the new tax law — starting in 2018, you can no longer deduct interest expenses on a HELOC as home mortgage expense unless you used the proceeds to buy, build, or substantially improve your home.

Remember, however, that just because a loan is not secured by your house, car, or bank account doesn’t mean the consequences are less dire in the long term if you can’t pay back the loan. Financial institutions can still take all legal measures to collect from you, such as reporting late or missed payments to the credit bureaus and eventually getting a judgment and garnishing wages or seizing assets.

3 times a personal loan may be a bad idea

  1. When you’re just going deeper into debt
  2. If you can get a lower interest rate with another type of loan
  3. When the bank might not lend to you at a favorable rate

1. When you’re just going deeper into debt

Not all debt is bad. You can use debt wisely to pay for things you need, to buy assets that last and have long-term value, or as part of a strategy to help you work your way out of debt.

However, some people fall into the trap of trying to solve every money problem by borrowing more. Eventually that gets them into trouble. No debt is good if there’s too much of it, or if your total financial picture is looking worse every single year.

2. If you can get a lower interest rate with another type of loan

If you have good credit, you should be able to get a decent interest rate on a personal loan. However, sometimes another type of loan, like a home equity loan, may have an even lower rate.

Another low-interest rate option may be a credit card with a no- or low-interest introductory rate. These cards work especially well if they motivate you to pay off the balance before the introductory rate ends. Otherwise, if you still owe a substantial amount when the interest rate goes up, you could be right back where you started — spending too much of your money every month just trying to keep up with high interest expenses.

Read the fine print carefully before you take a cash advance or do a balance transfer on a no- or low-interest loan. Most credit card companies charge a transfer or cash advance fee, typically 3%. Try to find a card that doesn’t charge the extra fee, or make sure the total amount you pay on the loan is still worth it to you.

3. When the bank might not lend to you at a favorable rate

To get a personal loan, you need to have a good credit score, generally at least 640. You must also show the bank that you have the means to pay back the loan: for example, a job or other reliable source of income.

More Americans are using personal loans than ever, and the total amount Americans owe on personal loans as of mid-2018 is more than twice what is was only five years ago, in 2012, according to LendingTree data. If you are clear on why you need a loan and what you expect to gain by getting one, and you shop carefully, getting a personal loan could turn out to be a good long-term financial move for you.

Interested in a personal loan?

Lendingtree allows you to compare rates from multiple lenders by filling out one easy form. Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

RATES (APR)loan amount
5.74% – 16.24%1 $5,000 to $100,000
7.46% – 35.99% $1,000 to $50,000
7.99% – 35.89%* $1,000 to $50,000
5.99% – 24.99%3 $5,000 to $35,000
5.99% – 29.99%4 $7,500 to $40,000
6.79% – 20.89% $5,000 to $50,000
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Disclaimer: Student Loan Hero is a subsidiary of LendingTree
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.990% APR to 16.240% APR (with AutoPay). Variable rates from 5.74% APR to 14.700% APR (with AutoPay). SoFi rate ranges are current as of March 18, 2019 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.74% APR assumes current 1-month LIBOR rate of 2.43% plus 4.28% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
    See Consumer Licenses.
  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  5. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  6. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
3 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
4 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 5.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 5.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.

 Important Disclosures for Citizen.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Fixed interest rates from 6.79% – 20.89% (6.79% – 20.89% APR) based on applicable terms. Lowest rates range from 5.99%- 18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
     
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

Published in Loans, Personal Finance

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