When you apply for personal loans, these loans are unsecured. An unsecured loan is one that doesn’t require collateral.
If you aren’t sure about the ins and outs of personal loans, you may not be aware of the benefits of getting a personal loan. Before you go to apply for a personal loan, it is best you understand how they work, what you can use them for and how you can benefit from them.
Continue reading this article to learn important facts and benefits of personal loans.
What You Must Know About Personal Loans
Personal loans are one of the most common types of loans. It’s likely multiple people you know have taken on personal loans so you can ask them about their experience.
1. May Allow for Higher Loan Amounts than Credit Cards
If you have credit cards but they don’t have enough on them to purchase the item that you want, personal loans may be the best option for you. The amount of money credit cards allow you to spend depend upon the credit card network and its criteria for a good cardholder.
Personal loan limits are often higher than those of credit cards due to their structure and vetting process.
2. Interest Rates are Likely Lower Than Credit Cards
Even if your credit card limits are high enough for you to purchase whatever it is that you want, their interest rates are usually higher than personal loans.
If you only paid the minimum payment on your credit cards, you would be stuck in their debt forever. High interest rates keep digging you into debt faster and faster and you’re not even paying on the principle anymore when you have a high credit card balance and are only making the minimum payment.
3. Get the Money You Need Without Collateral
When you don’t want to put up collateral, personal loans are the best place to turn to. If you default on the loan, you won’t lose a car, home or another item that secures the loan.
4. Know How Much to Pay and When to Pay
When you borrow money using personal loans, you’ll know how much money you’re required to pay back. You’ll not only know how much money you have to pay back but you’ll also see what you’ll be paying when.
The payment schedule on your personal loan is transparent so you know how much you’re paying on the principle of the loan and how much you’re paying on the interest.
5. Often Offers Longer Payment Terms Than Other Options
If you try to get a loan through other methods, you’ll likely find their repayment terms are very short. While shorter payment terms allow you to pay less interest on the entire loan, the monthly payments may be high which can cause some strain on your finances.
6. Can Help You Refinance & Consolidate Debt
If you are paying high-interest rates on credit cards, a personal loan can help you refinance and consolidate debt. Instead of paying on 5 credit cards that have 26% interest, you could instead pay on a personal loan with a much lower interest rate.
Before you consolidate your debt, consider all of the costs involved. If there are any fees for a loan application or other activities, make sure you factor it in so you know if you’re saving money or not.
7. Finally Get that Dream Item
Another major benefit of getting a personal loan is being able to get your dream item before you have the cash for it. Maybe you want to get a boat, RV or a 4-wheeler but you don’t have all of the cash to get it.
Paying a little extra money to get your dream item now vs. later makes sense so you can enjoy it for a longer time.
Increase Your Credit Score & Get a Better Interest Rate
The better your credit score, the better your interest is going to be. Many people aren’t sure how to increase their credit score so they can get a better interest rate the next time they go for a loan.
Here are some simple tips that will help you get a better interest rate when you apply for a personal loan.
Always Pay on Time
If you miss payments, it is going to show up on your credit report and hurt your credit score. If you have a history of paying on time, this will boost your credit score and make you an attractive potential borrower.
Keep Accounts Open & in Good Standing
When you pay a credit card account off, you might consider closing it. When you close the account it doesn’t help your credit. While it’s in good standing, it’s just a remark on your credit report but it doesn’t factor into how you manage credit. Instead of canceling your accounts when you pay them off, keep them open and in good standing. Use them from time to time and pay them off in the same month.
Keep Credit Card Utilization at 30% or Below
If you use a large percent of your credit card’s available credit, you look like an at-risk borrower. Only use 30% or less of your available credit on your credit cards when you’re trying to get a personal loan.
Learn More About Living the Good Life
Now that you know more about personal loans and their benefits, why stop learning there? We have more articles on finance, lifestyle and other important topics.
Navigate through our website, find your favorite sections, drop a bookmark and come back later for more great reads.