You may have seen an Instagram ad, a Google banner, or part of actual paper mail advertising a personal loan. Maybe the ad claims that you are "pre-approved". You wonder if it's right for your situation.
"Personal loans provide many benefits to the right borrower, but as with any financial solution, they are not right for everyone," said Shannah Compton Game, a CERTIFIED FINANCIAL PLANNER® professional and Haven Life contributor. So is it right for you? You can find out the answer to that question by reading through these tips on what a personal loan is, how it works and what you should consider before choosing one.
Personal loans are available in all sizes, but it is not uncommon for people to take out personal loans in the low to mid five digits. People often consider personal loans to pay or pay credit card debt, but can also get a personal loan to pay for medical bills, home improvement projects, or an unexpected cost.
You can apply for a personal loan on your bank or credit union, and there are also many lenders online. The loan will have an interest rate that is similar to all loans and a certain repayment term.
Potential Benefits of a Personal Loan
The benefit of a personal loan is an infusion of money that you can use for that purpose at will. The terms and conditions are based on the strength of your application (credit score, payment history and other factors). A personal loan can offer a lower interest rate than a credit card, and some people use a personal loan to repay high interest debt. Another common use is debt consolidation. Taking a personal loan to pay off multiple debts means that you only have one invoice to pay each month instead of many.
As with any financial product, it is important to read the fine. "Think about how much debt you have, the interest rates associated with that debt, the fees associated with the personal loan and what your plan is to use and repay the personal loan," says Game.
A personal loan may also be one good way to work to achieve a higher credit score, especially if you have "thin" credit (you have no or several accounts in your credit file) .Add a deduction loan to your credit file can help you build a payment history. to pay in time.
Another way that a personal loan could help your credit is by lowering your credit utilization. If you pay out your credit cards with a mortgage loan (and do not recharge the cards), your exploitation may fall , even possibly to zero, and it will likely result in a better credit score, of course, many other factors go into your credit score, so there is no guarantee that you are flying Take your debt from credit card to a personal loan, giving you higher scores. However, credit points have a strong tendency to be inversely proportional to debt utilization.
"If your plan is to pay expensive credit card debt with a fixed monthly payment to lower your credit utilization rate, it may make sense to explore a personal loan," said the Game. The biggest impact on your credit score is your payment history and your credit utilization (your fluctuating debt balance over your credit limits) and the greatest importance is given to credit history from the past two years.
If all you do is stay away from the credit card debt and set up automatic payments on your personal loan, your score can increase dramatically in a relatively short time. In fact, some banks offer loans to creditors for this purpose.
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Potential Disadvantages of a Personal Loan
Disadvantage With a personal loan is that even if it is a noble purpose, you still put debt on your life. Even if you take a personal loan to pay off the credit card debt, it has an inherent risk – some people run the credit card balances right up again or fail to use the personal loan for the intended purpose, which is financially inferior to it.  The interest rate on a personal loan is usually fixed (not varying as on most credit cards) for the loan period and average interest rates on personal loans tend to be higher than average rates on mortgages and many car loans. Some applicants will be offered an interest rate that is very high and possibly even higher than their credit card prices. Advertised rates from popular lenders such as SoFi® and Lending Club® tend to go up to about 36 percent.
A personal loan is displayed on your credit report. If your lender reports that you have missed one or more payments, your credit score will hit, which can make it difficult to access other credit products when you need them, at least until your score improves. Note that some lenders do not report late payments until they are 30 or more days late, but may charge a late fee on the first day after the due date.
Should you use a personal loan to pay off debt?
Whether you should take a personal loan to repay the debt depends on several factors.
The first thing to keep in mind is how the debt was created in the first place. Was it an unexpected expense, like a medical bill, or was it created by living beyond your means? What can you do because you don't get into that situation again? You may need to come up with a budget plan or lower your current cost of living.
As said, a personal loan can be an effective way to lower your total debt cost, reduce the number of monthly payments you have to make, and set a clear target for the payout. A credit card balance can last for decades. There is little consolation to know exactly when the debt will be paid and a personal loan can help you achieve it.
You may also have other options available to you. For example, if you qualify, it may make sense to take advantage of a 0 percent balance transfer agreement. Keep in mind that there is usually a fee that is linked to balance transfers.
If you have family members who can help, it may make sense to request a loan from them. If you do, treat it as a bank loan. Approve the terms in writing. It shows that you respect and appreciate the loan and intend to pay back.
If you're really struggling with the credit card debt, you might want to consider entering into a debt management plan (DMP). In a DMP, a credit advisor works with your creditors and can get your interest rates lowered and fees waived. You make a single monthly payment to the credit institution, which pays funds to your creditors. You usually need to give up credit cards while you are enrolled in the plan, but it is designed to get you out of debt within three to five years. If this option sounds like it might be a good fit, visit the National Foundation for Credit Counseling to find a credit counselor in your area.
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What to consider before taking a personal loan
Explore your options. The personal loan space is a crowded one. Your bank or credit union, online banks, peer-to-peer lenders – you can qualify for many different options. So what do you choose? The right thing for you may not be the offer that landed in your mailbox, no matter how enticing the terms sound. "Remember that loan options are not created equally, so get quotes from at least two different lenders to make a fair comparison before you commit," says the Game.
Shop and compare. When shopping, it is a good idea to carefully compare fees, interest rates and other terms. For example, the interest rate is fixed – which means that it remains the same rate for the length of the term – or variable, which means that it can change? Is there a fee to pay the loan early? What do customers have to say about the lender through online reviews?
Change your habits. If your pattern is to spend over your funds, it may be good to work with a debt counselor who can help you create a strategy that will help you avoid a repeat of the same situation in the future. Depending on your income, you can pay a fee for credit counseling, but for many consumers the service is free. For those who pay a fee, it is usually $ 20 to $ 40 a month, and you can meet your advisor personally, by phone or online.
Save first. "If you dream of taking a tropical vacation with the funds, it is probably best to skip the loan and not rack up more debt," Game said. In other words, if you are considering a personal loan for a large cost, such as a wedding or a trip, ask yourself if your vision is really worth paying for three, four, five or more years. Taking debt can be risky, so it can be a better option to change your plans or make a commitment to save now so you can afford the expense immediately later.
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Anna Davies is a writer, editor and content strategist who lives in Jersey City, NJ. She has written for New York, Glamor, Elle, Men & # 39; s Health and others and has written 13 young adult novels under different names. Her favorite things to spend money on are discount theater tickets, oversized jerseys, and cold bread lattes.
Haven Life Insurance Agency offers this only as educational information. Haven Life does not support the companies, products, services and / or strategies discussed here.
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