There are plenty of reasons why taking out a personal loan might be a great financial move for you or your family. Read on to learn more about when you may want to take out a personal loan and how to use it to your best advantage!
1. Why You Need a Personal Loan
There are plenty of reasons why you may need a personal loan. You could be trying to consolidate debt, plan a big event, finance your home remodeling, or making a large purchase! By taking out a personal loan, you can pay focus on paying off one debt rather than debt in many different places.
2. What Kind of Loan Do You Need?
1. Unsecured Loans
Unsecured personal loans aren't backed by collateral, meaning lenders only look at your financial history in order to approve your loan. This also means interest rates are typically higher and ultimately dependent on your credit. Unsecured loans are generally the better option if you need cash for a specific purchase. When taking out an unsecured loan, lenders will typically consider your credit score, income, and debt-to-income ratio to see if you qualify.
2. Secured Loans
With secured loans, lenders take a CD or savings account as collateral. If a situation arises where you're unable to make payments, the lender has assets for payment. Secured loans are typically easier to apply for because collateral is involved. Within the umbrella of secured loans, you have mortgages and auto loans where either your house or car become your collateral. When considering a secured loan, check for additional fees associated with the loan and how quickly it takes to obtain the money.
3. Balance Transfer Credit Card
Balance transfer credit cards feature a 0% introductory APR that you could pay off before interest rates rise. These are especially recommended to those who find themselves in credit card debt they can't easily pay off. The average credit card interest rate is 15%, so the 0% introductory APR could save you thousands! Another benefit of the balance transfer credit card is it can help you simplify your debt by consolidating your debt into one credit card.
4. Line of Credit
If you're taking out a loan to buy a house, a line of credit may be a better option for you. Lines of credit are loans specifically geared toward large amounts of debt, so interest rates tend to be lower and payments tend to be over a longer amount of time. However, one drawback of an equity line of credit is that your home would become the collateral by default.
3. How Does a Personal Loan Impact my Credit Score?
Looking at your credit score is part of the lending process when you first apply. This is known as a hard inquiry and can lower your credit score by a few points each time. Ask your lender if they can do a soft pull instead, which won't lower your credit score like a hard pull.
4. What Types of Fees Exist for Personal Loans?
There are three main fees to consider when paying back your personal loan:
1. Interest Rates
Interest rates on personal loans can range anywhere from 5% to 36%. This is where having a good credit score can come in handy, as you can negotiate a lower interest rate. In addition, the longer your loan term, the more interest you will have to repay overall.
2. Origination Fees
Origination fees are processing fees for your personal loan. These can range anywhere from 1% to 6% of the total loan amount.
3. Prepayment Penalties
Some lenders will charge you an additional fee if you pay off your loan early. They discourage early payment because they lose out on additional interest if you pay your loan off too early.
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