Personal loans were considered to be the last resort for people wanting to escape debt. However, since the emergence of fintech or financial technology firms making unsecured personal loan offers in the market, personal loan balances have surged.
In the data collected by Experian, personal loans reached $305 billion in the second quarter of 2019. That is a 12% increase year over year.
It sounds quite interesting to know why consumers turn to personal loans. Do they offer benefits and what are those? Read on to know more.
Personal Loan Defined
A personal loan is an amount of money that typically comes with fixed monthly payments and fixed interest rates. Though there are some personal loans that have variable rates.
The lender sets the amount of money you can borrow and the repayment terms depending on several factors:
- Total monthly debt payments
- Whether you own or rent a home, etc.
With this type of loan, you can access a lump sum of money and pay the loan on its fixed payoff date on an installment basis. This makes personal loans like from GoodCheddar, a good option for people who want to consolidate their debt, buy a car, take a vacation and pay unexpected or emergency expenses.
Personal installment loans are different from that of a credit card. Credit cards are usually open-ended which means that you can continue to make new purchases and pay them off indefinitely.
Benefits of Personal Loans
Why do consumers prefer personal loans over other alternatives? Consider these benefits offered by this type of loan.
1. The Repayment Schedule is Predictable
Most personal loans come with fixed repayment terms, interest rates and monthly payments. With this, you will know how many monthly repayments you need to make and the total interest cost of your loan. This makes budgeting easier.
Compared to personal loans, revolving credit lines like credit cards and home equity lines of credit have only the monthly payment due date that is predictable. The required monthly payment and interest rate may be subject to change depending on factors like credit utilization and benchmark interest rates.
2. Lower Interest Rates than Credit Cards
Personal loans are comparably lower than credit cards. For very well-qualified borrowers, interest rates for unsecured personal loans may start at 5% or 6% APR. You can rarely find an APR that is under 10% with credit cards regardless of how qualified the borrower is.
There are plenty of credit cards that offer low to no interest rates over the introductory period. However, the interest rate may spike to 10%, 20% or even higher once the intro period is over. The introductory period may last from 12-21 months.
If you need lump sum money right away and you can afford to repay the loan over time, personal loans can be a great option for you. Not only that the interest rate is lower, you can also negotiate it with your lender.
3. Can Be Used for Multiple Purposes
Unlike other loans that can only be used for a single purpose, personal loans can be used on almost anything like emergency and even personal expenses. Here are some ways where you can use your personal loans:
- Purchasing a car
- Debt Consolidation
- Wedding Expenses
- Home Renovation
You might be asked to disclose the primary purpose of the loan with the lender, but if there is money left, you can use it for something else. The use of personal loans may come with a few exceptions but for the most part, you can use it on whatever you want.
4. Help Improve Your Credit Score
Another benefit you can get from a personal loan is that it can help improve your credit score. Making payments on time and returning the borrowed amount required can help build a credit history.
Since a personal installment loan is different from revolving credit, it creates diversity in the types of accounts you have. Having different types of debt and good credit history can give your credit score a boost.
A personal loan may come with a lot of benefits but it is still a debt that needs to be paid off. Before taking out any loan, it is wise to ask yourself whether you have a good reason for obtaining one. Be smart enough to use it on the things that you really need rather than things that you just merely want.
I am Arjun Kumar. I am the owner and administrator of Finance Gradeup. I have completed my education in Arts & Technology. Arjun Kumar usually has interests in playing games, reading and writing. He was a brilliant student during his college days. He also works for many private companies, but the main interest of Arjun Kumar is digital marketing. He thinks that reading is a must before providing any quality information to his readers. You can find Arjun Kumar on much social media handles online, or you can learn more about him in about us page.