5 personal loan benefits you need to know

Taking out a personal loan can benefit you beyond just getting your hands on the cash you need quickly. When used responsibly, a personal loan can help you build credit and make budgeting easier with a fixed monthly payment.

This guide explores the advantages of personal loans and how to decide if a personal loan is the right fit for your funding needs.

How to obtain a personal loan

Personal loans are small to midsize loans that you can use for a variety of needs. Personal loans typically range in value from $2,000 to $45,000, which the same range you’ll find through Rocket Loans^SM. However, the loan value differs from lender to lender.

Getting a personal loan involves a relatively straightforward application process in which lenders assess your credit report and debt-to-income ratio (DTI). These factors influence how much you can borrow and the interest rate of the loan.

The 5 key benefits of a personal loan

Personal loans offer a variety of benefits, making them a preferred loan option for many consumer borrowers. However, there are five key benefits that make these loans so popular for consumers who need additional cash for expenses or to consolidate debt. Explore the standout reasons below.

1. Personal loans offer flexibility

One major benefit that a personal loan can have over other types of loans is its versatility. Unlike a mortgage, auto loan or student loans, a personal loan can be used for many different purchases and expenses.

While most lenders offer you free reign on how to use the funds, common uses include consolidating your debt, completing a home improvement project, and covering emergency expenses when you don’t have an emergency fund. But depending on your situation, you might have other uses in mind, like paying for a wedding or paying for a medical expense.

2. Personal loans let you access the funds you need fast

When you need funds fast, a personal loan could offer the speed you need. Typically, personal loans can take less time to pay out than some other loans. On average, you can expect to receive your loan in 1 – 7 business days. Some personal loan providers, like Rocket Loans, can even get you your money on the same day you’re approved with same-day funding.

Throughout the personal loan process, quickly responding to any questions from the lender ensures the process moves smoothly. Any delayed responses on your end could stretch out the time it takes to receive your loan funds.

In contrast, other types of loans, like a mortgage loan can take weeks to process.

3. Personal loans help you boost your credit score

Payment history accounts for 35% of your credit score. With that, taking out a personal loan can affect your credit score in a positive way, if you stick to making on-time payments. 

When you initially take out a loan, your credit score may drop slightly as a result of a lender’s hard inquiry. But making regular on-time monthly payments can demonstrate your creditworthiness and improve your score. That improved score could help you get even better rates and terms with future loans.

Additionally, having a personal loan among your other debts can diversify your credit mix, and using one to pay off your credit card balance can help lower your credit utilization rate.

Of course, a personal loan can hurt your credit score if you don’t manage it responsibly. If you consistently make late payments or default on the loan, it will hurt your score.

4. A fixed repayment schedule

Personal loans offer a fixed interest rate. This means that your monthly payment stays the same throughout the life of the loan. You know what to budget each month for payments, eliminating any monthly payment surprises.

In contrast, a credit card involves a changing interest rate and monthly payment. The changing payment presents a challenge for most budgeters. For some borrowers, choosing to consolidate credit card balances into a single personal loan offers relief on multiple fronts. Not only will you lock in a fixed monthly payment to make budgeting easier, but you may also lock in a lower interest rate as you pay down the debt.

5. Personal loans don’t require collateral

Obtaining a personal loan is based primarily on your credit score and your DTI. Lenders won’t typically require any collateral to secure the loan. Unlike with secured loans, you aren’t at risk of losing valuable assets in the event you fail to repay the loan.

However, unsecured loans don’t come without risk. A defaulted personal loan remains on your credit report for up to 10 years and can affect your ability to take out loans in the future.

While the consequences of defaulting on a personal loan are significant, they usually aren’t as traumatic as those associated with a secured loan. For example, you won’t experience a foreclosure on your home or a repossession of your vehicle.

When to consider a personal loan

Personal loans are an ideal loan choice for individuals with good or excellent credit scores. If you are unsure where your score falls, you can request your credit score from one or all of the three credit reporting bureaus (EquifaxⓇ, Experian™, and TransUnion®). Your credit score will range from 300 to 850, and this is how each score measures up:

• 300 to 579 Poor
• 580 to 669 Fair
• 670 to 739 Good
• 740 to 799 Very good
• 800+ Excellent

If your credit isn’t good or excellent, take some steps to improve your credit score so that you could apply for more favorable rates and terms. Some steps you can take include committing to on-time payments for any current loans, paying down some of your debt, and avoiding any new credit applications.

The pros and cons of personal loans

Personal loans offer many benefits, but these loans are not ideal for every consumer. Below are the notable benefits and disadvantages.

Pros

• Flexibility: Personal loans offer flexibility. Use them for what you need.
• Funding speed: You can receive the money you need fast. In most cases, you can expect access to funds within a week.
• Credit building tool: Personal loans can help improve your credit score.
• Fixed payment: Personal loans offer a fixed monthly payment, which makes budgeting easier.
• No collateral requirements: No collateral is required for a personal loan.

Cons

• Low interest rates aren’t always available: Individuals with lower credit scores may face higher interest rates.
• Potential damage to credit score: Defaulting on a personal loan leads to a large hit on your credit score. The default remains on the credit report for a decade.
• Lenders might require collateral from some lenders: Individuals with a low credit score might be required to offer collateral to back the value of their loan.

The bottom line: Personal loans can help you pay for almost anything

Taking out a personal loan offers potential benefits beyond just receiving a large amount of cash. If you’re smart about your finances, and repay your debt on time each month, you can come out the other side of your loan with a stronger credit score.

Apply online today with Rocket Loans to see the rates and terms for which you may prequalify.