Should I Get A Personal Loan?
6-Minute ReadFebruary 25, 2022
Whether you’re looking to combine high-interest debts or pay for a large purchase, a personal loan is one way to get your hands on the funds you need right now. Personal loans can be a better (and cheaper) option than turning to credit cards, and often come with a timely repayment plan and no requirements for collateral, making them ideal for many borrowers.
While these loans offer flexible and affordable options for customers, are they really the best funding option available? Let’s take a look at the impacts of personal loans on your finances and credit, and when you should consider getting one.
What Is A Personal Loan?
Like many other loan types – such as mortgages or auto loans – a personal loan is a product that helps you finance the things you want (or need) to buy. Personal loans are personal and offered by a variety of lenders, such as your local bank or credit union or an online lender. Whether you choose to apply online or in person, approval is based on a number of factors, including your creditworthiness.
How Personal Loans Work
Another way that personal loans differ from auto loans and mortgages is that they are unsecured. This means that the bank won’t require any collateral (such as your car or your house) for the debt. Personal loans are also not purchase specific, meaning they can be used for any number of things.
You will find that most lenders offer personal loans up to $45,000, though there are a few that may offer even more. How much money you can borrow, however, is dependent on your personal financial factors. Your credit score and income will be the biggest factors in not only determining approval but also loan limits. The higher your score and the more money you make, the more a lender is likely to offer you.
What Can I Use A Personal Loan For?
So, what can you use a personal loan for? The answer is pretty much anything! Let’s take a look at a few of the most common uses for personal loans.
Debt consolidation is one of the most common uses for a personal loan. Paying down your debts, whether that’s credit card or other high-interest debt, can help improve your credit score and decrease your utilization rate over time. A personal loan will also consolidate your debts into one fixed-rate monthly payment.
If you are unable to utilize or don’t have enough equity in your home, you’ll need to find another source of financing for making major renovations on your home. A personal loan can help you finance these costly home improvements, especially if you need the funds quickly.
If you’re facing any significant medical bills, recently had a large appliance kick the bucket or maybe your car needs a major repair, a personal loan can help you cover these unexpected expenses. These situations can be financially burdening, but knowing that you have options available can help you get through them.
Large Purchases Or Major Life Events
When making a large purchase or planning for a major life event such as a wedding, starting a family, funerals or even going on a dream vacation, you may find yourself in need of financial assistance. A personal loan can help you cover the significant expenses that are often incurred with these events.
How To Decide If You Should Get A Personal Loan
If you’re considering a personal loan, you may already realize many of the selling points. Although personal loans can be an attractive and sensible choice for many, there are also a few drawbacks that you should take into consideration before choosing to take one out.
When You Should Consider A Personal Loan
You should consider getting a personal loan if any of the following apply to you:
- You have a strong credit score. For borrowers with strong credit scores, personal loans have more affordable products with reasonable interest rates compared to credit cards or payday loans.
- You don’t want to put any collateral down. Most personal loans are unsecured, meaning that you won’t need to put up any collateral for your funds. In the case that you default on the loan, your lender won’t be able to repossess any of your assets.
- You want flexibility. Some types of loans have limitations as to what they can be used for. Personal loans, however, are one of the only types of loans that don’t have these restrictions. You can get a personal loan for any number of reasons, regardless of what you want to fund, so long as it is not for illegal activities. With a personal loan, you can also receive the funds quicker than you would with other types of loans. With Rocket LoansSM same-day funding, you could receive your money the same day you apply.*
- You want set loan terms. Unlike credit cards, your personal loan will be on a fixed term, meaning you’ll know exactly how long it will take to pay off. This can make it easier to manage and budget for your monthly payments.
When You Shouldn’t Get A Personal Loan
Personal loans aren’t the right option for everyone. If you meet any of these criteria, you may want to consider looking into alternative finance options.
- You would have difficulty making the high monthly payments. Depending on how much you borrow, your personal loan might have a high monthly payment since there is a set deadline that the loan needs to be paid off by.
- Your credit score is high. Depending on your credit score, your interest rate may be higher than alternative options. If you have a poor credit score, it’s often worth holding off on applying for a personal loan until you’ve repaired your score or consider an alternative option.
- You don’t have your spending under control. Taking out a personal loan might not be the best idea if you haven’t gotten your spending or budget management under control. For instance, using a personal loan for debt consolidation or to pay down card balances becomes a bad choice if you then overspend and max out those credit cards all over again.
- If you’re planning to use it for student loan debt. Lastly, if you’re using a personal loan to pay off student loan debt, you may put yourself at a tax disadvantage. That’s because the IRS allows you to deduct paid student loan interest each year when you file your income tax return. If you refinance your educational debt into a personal loan, you may no longer be able to take that deduction.
Is A Personal Loan Right For Me?
If you’re wondering whether a personal loan is right for you, a good starting point is to consider whether you’ll be able to afford the payments and whether a loan is necessary.
In general, personal loans can be a good idea for consumers with excellent credit. Interest rates are often very reasonable for creditworthy borrowers, making them relatively affordable to pay back and a better option than many funding alternatives.
Personal loans may not be ideal for those consumers with less-than-excellent credit, however. In some cases, interest rates may be too high to warrant taking out a loan, even rivaling the rates of credit cards in some cases. Personal loans may also be tricky for you if you're self-employed.
Be sure to shop around for the best possible loan terms before moving forward with funding. You should also read the fine print of your loan to know exactly how much it will cost you in interest.
While not for everyone, a personal loan can be a great way for some borrowers to consolidate debt, fund large purchases, and/or quickly improve their credit report. They offer lower interest rates than credit cards on average, with borrowing limits up to $45,000 or more.
As a typically unsecured product, personal loans are also easier to obtain than many other loan products, and don’t require collateral from borrowers. Depending on your situation, however, you may want to consider waiting to apply for a personal loan or choosing an alternative financing option.
Whether you want to take your family on a vacation, remodel your home, pay for expensive medical or dental treatment, consolidate existing high-interest debt or pay for a wedding, a personal loan is likely your best option.
Before applying for a personal loan, be sure to check your credit report for any inaccuracies or concerns. Then, you can shop around for the best possible rates at terms that fit your budget.
If you’re ready to apply for a personal loan with Rocket Loans, get started on the process today.
*Same day funding is available for clients completing the loan process and signing the Promissory Note by 1:00 p.m. ET on a business day. Also note, the ACH credit will be submitted to your bank the same business day. This may result in same day funding, but results may vary, and your bank may have rules that limit our ability to credit your account. We are not responsible for delays that may occur due to an incorrect routing number, an incorrect account number or errors of your financial institution.
Rocket Loans does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation.
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