Creating a budget can make it easier to manage your monthly bills, but you can’t anticipate every expense. A surprise expense can catch you off guard, but a personal loan can provide some coverage. This financial product gives you extra cash that you can use for any purpose, and you don’t need collateral to get a loan. If you are on the fence about getting a personal loan, knowing the advantages of personal loans can help.
What is a personal loan?
A personal loan is a financial product that gives the borrower cash they must repay over time. The term duration and interest rate impact your monthly payments. You will end up paying more than what the loan is worth, but you get money right away that could take several months to acquire via paychecks. The borrower pays interest for the privilege of accessing significant capital right away.
8 benefits of obtaining a personal loan
Does a personal loan make sense for your finances? Understanding personal loan benefits can help you decide whether it is worth considering.
1. Opportunity to build credit
Your credit score determines your interest rate, loan amount and various costs. A higher credit score will save you money in the long run, and a personal loan can help with building credit. Each of your on-time payments gets reported to the major credit bureaus. Because payment history makes up 35% of your FICO credit score, those personal loan payments can add several points to your score.
2. Fixed payment schedule
Personal loans have predictable monthly payments that do not fluctuate based on changes to interest rates. Having your finances depend on what the Federal Reserve does next can be stressful, but personal loans let you bypass that fate. A consistent monthly payment is easier to plan for in your budget.
3. Flexibility of use
You can use the funds from a personal loan for any expense. Other loans require you to use capital for a specific asset that becomes collateral.
4. Don’t need to drain your savings
When an emergency expense comes your way, a personal loan can preserve your savings account. Some people may prefer to draw from their emergency funds to avoid paying interest, but what if another emergency comes up after you have drained your savings? Getting a personal loan now gives you more flexibility and funds if you encounter another surprise expense.
5. Pay stretched out over time
How would you feel about spending $10,000 today on a necessary purchase? Some people have that type of money, but it’s no easy feat to spend that much money on a whim. Paying less than $200 per month over a five-year loan term for the same purchase may sound more manageable.
6. Opportunity to consolidate high-interest debt
Personal loans aren’t just for affording purchases and protecting your emergency savings. These loans can also help with other debt. If you have thousands of dollars on your credit card balance, you can repay the debt with a personal loan. This strategy still leaves you with debt, but you can get a lower interest rate with this strategy.
7. Typically no need for collateral
Personal loans are often unsecured loans, which means you do not need any collateral. While a mortgage uses the property as collateral and equipment loans use the purchased asset as collateral, you don’t have to worry about collateral for a personal loan. Not having collateral on your loan is a benefit of personal loans.
8. Quick access to funds
Some lenders give you funds within one to three business days. The quick turnaround can arrive sooner than your next paycheck and give you the flexibility to cover emergency expenses quickly.
MoneyLion offers a service to help you find personal loan offers based on the info you provide, you can get matched with offers for up to $50,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you. You can also use the loan funds to pay off other existing debts. MoneyLion is here to help.
What to consider before taking out a personal loan
A personal loan can fortify your finances and give you more flexibility with tackling large purchases. But every financial product has pros and cons. You should keep these details in mind before taking out a personal loan.
1. Maintain good credit
A good credit score gives you more choices. You could borrow more money from lenders and receive lower interest rates. Landlords look at your credit history when reviewing your application, and you can even save on your utilities if you have a good credit score.
A personal loan gives you the opportunity to improve your credit score, but falling behind on your payments could hurt your score. A lower score can make it more difficult and expensive to borrow money in the future. Keeping your credit score front and center can help you avoid that setback and capitalize on the advantages personal loans offer.
2. Avoid borrowing more than you can afford to repay
Before borrowing money and accepting a loan offer, look at your monthly budget and determine how much you can afford on loan payments each month. You should give yourself a reasonable margin of safety in case another surprise expense shows up. If you feel like money would become tight from this loan, you should consider another funding source or extend the loan’s duration. Adding more years to the loan’s back end minimizes the monthly payments.
3. Make timely payments
Paying your loan on time helps your credit score and makes it easier to qualify for financing in the future. But if you miss any payments, your score may take a dip. It’s even worse if you ignore the loan entirely, as the remaining balance will accrue interest and eventually go to a debt collection agency. Your wages can get garnished to cover the loan if you ignore it for too long. You can save a lot of trouble by picking up a side hustle if you need the extra cash and communicating with your lender so you don’t have to deal with a debt collection agency.
Get the funds you need with the flexibility that suits you
Personal loans give borrowers a healthy mix of funds and flexibility. You can decide on the loan’s duration and how much you want to borrow. Personal loans can go toward any expense and have lower interest rates and fees than most types of loans.
Will obtaining a personal loan affect my credit score?
Obtaining a personal loan usually triggers a hard credit check, which could reduce your score by a few points. If you make on-time payments, your credit score will be better off than before the loan. But falling behind on payments will hurt your credit score.
Can I use a personal loan for my business?
You can use a personal loan for your business. Lenders do not ask how you will use the funds.
How do I know whether I should take out a personal loan?
A personal loan can help if you have a large expense and worry about how you will raise enough money to cover it. A personal loan can reduce your financial stress and make large purchases more manageable.