Personal loans are a financial tool with immense potential, offering a lifeline in times of need. Imagine facing an unexpected medical bill, a sudden home repair, or a significant life event on the horizon. Personal loans can step in as your reliable financial ally.
In this comprehensive guide, we will explore the question: what is the benefit of obtaining a personal loan? We will shed light on how they can empower your financial journey.
Discover how these personal loans can transform your financial landscape when managed wisely, from debt consolidation to dream vacations.
11 Benefits of Personal Loans
So, what is the benefit of obtaining a personal loan? The following list offers insights into some of the benefits of personal loans.
1. Personal Loans are Flexible in Their Uses
Personal loans excel in their remarkable flexibility, separating them from specialized loans like mortgages or auto loans. They empower borrowers to use funds for diverse purposes, from home renovations and education expenses to unexpected medical bills, showcasing their adaptability and convenience.
2. Lower Interest Rates than a Credit Card
Personal loans typically have lower interest rates than credit cards, known for their high APRs. Credit card balances carried over month-to-month can lead to spiraling costs.
Conversely, personal loans offer fixed rates, simplifying monthly payments and potentially resulting in significant interest savings, which is particularly beneficial for debt consolidation and significant expenses.
3. Higher Borrowing Limit than a Credit Card
Personal loans typically offer higher borrowing limits than credit cards. While credit cards have a predetermined credit limit based on your creditworthiness, personal loans can provide access to more substantial sums of money. This higher borrowing limit makes personal loans ideal for significant expenditures such as weddings, renovations, or major purchases.
4. Predictable Repayment Schedule
The predictability of a personal loan’s repayment schedule is a notable advantage. A set monthly payment and a defined loan term enable precise budgeting, offering assurance in allocating the right amount for monthly payments. This is especially beneficial for those favoring structured financial planning.
5. Consolidate High-Interest Debt
Personal loans are frequently employed for debt consolidation, especially when faced with high-interest debts like credit card balances or payday loans.
By consolidating them into a single, lower-interest monthly payment, you simplify your finances and potentially save on interest costs, a critical step towards achieving financial stability and debt freedom.
6. Build Credit Score
A well-handled personal loan with timely payments showcases responsible credit behavior to credit agencies. Over time, this can enhance your credit score, paving the way for improved financial opportunities like lower interest rates on future loans and credit cards.
The table below summarizes how interest rates become more favorable as credit scores increase.
| Credit score | Average loan interest rate |
| 720–850 | 10.73%-12.50% |
| 690–719 | 13.50%-15.50% |
| 630–689 | 17.80%-19.90% |
| 300–629 | 28.50%-32.00% |
7. Repayment Term Longer
Personal loans frequently offer extended repayment terms compared to credit cards. While credit cards demand monthly minimum payments, personal loans can span several years. This extended timeline can enhance manageability, especially for those with limited cash flow. However, aligning it with financial goals is crucial.
8. Useful for Weddings, Vacations, Etc.
Life is full of important milestones and experiences, and personal loans can help you finance them without tapping into your savings. Whether you’re planning a dream wedding, a once-in-a-lifetime vacation, or a home improvement project, a personal loan can provide the necessary funds. This allows you to enjoy these special moments without compromising your financial stability.
9. Easy to Apply For
Obtaining a personal loan is a straightforward process. Most financial institutions, both traditional and online, offer personal loans with streamlined application procedures. The ease of application and a relatively quick approval process means you can access the funds you need quickly. This simplicity makes personal loans accessible to a wide range of borrowers.
10. No Collateral Required (Typically)
Personal loans are typically unsecured, sparing borrowers from the need to provide collateral like homes or cars. This sets them apart from loans such as mortgages or auto loans, which rely on asset security. This feature can attract borrowers who need more valuable assets to pledge or wish to avoid risking their assets.
11. Fast Funding
Personal loans can be a lifesaver when faced with an urgent financial need. Many lenders offer fast funding options, which means you can receive the loan proceeds within a few business days of approval.
Quick access to funds can be crucial when you need instant cash for emergencies or time-sensitive situations, providing financial security when needed most.
Advantages and Disadvantages of Personal Loans [Table Comparison]
| Advantages of Personal Loans | Disadvantages of Personal Loans |
|---|---|
| Consolidate high-interest debt: Combine multiple high-interest debts into a single loan with a potentially lower interest rate, potentially saving money on interest payments. | Debt burden: Adds additional debt to your financial obligations, potentially increasing stress and impacting your credit score if not managed responsibly. |
| Finance large purchases: Access a lump sum of cash to cover unexpected expenses or major purchases like home improvement projects, medical bills, or debt consolidation. | Fixed monthly payments: Limits flexibility in your monthly budget, especially if you face unexpected financial difficulties. |
| Improve credit score: Making timely payments can positively impact your credit score, making it easier to qualify for future loans with better terms. | Temptation to overspend: Easy access to funds can lead to overspending and potential difficulty making future payments. |
| No collateral required: Unlike secured loans, personal loans don’t require collateral, making them accessible to borrowers with limited assets. | Higher interest rates: Personal loan interest rates can be higher than those of secured loans like mortgages or car loans. |
| Fast access to funds: Personal loans can be approved and funded quickly, providing immediate access to cash when needed. | Prepayment penalties: Some lenders charge fees for paying off the loan early, limiting flexibility. |
| Flexible repayment terms: Choose a loan term that fits your budget, allowing you to spread out payments over a manageable period. | Origination fees: Lenders may charge origination fees as a percentage of the loan amount, adding to the total cost. |
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How Much Can I Borrow With a Personal Loan?
Personal loan amounts hinge on creditworthiness, income, and lender policies. Typically, they span from a few hundred to tens of thousands of dollars.
Lenders gauge your repayment capacity via credit score and income, favoring higher scores and steady income for larger loans. Borrow wisely, only what’s manageable, to prevent financial strain.
What Happens if You Pay Off a Personal Loan Early?
Paying off a personal loan early can have both advantages and potential drawbacks. On the positive side, paying off the loan ahead of schedule can save you a lot of money on interest payments, as you’ll be reducing the total interest paid over the life of the loan.
Additionally, it can improve your credit score by demonstrating responsible financial behavior.
However, some lenders may charge prepayment penalties or fees for early repayment. Reviewing your loan agreement and discussing any potential penalties with your lender before making extra payments is crucial.
If there are no penalties, paying off your loan before schedule can be a smart financial move, helping you achieve financial freedom sooner.
How Much Will a Loan Inquiry Drop My Credit Score?
When you apply for a personal loan or any credit, the lender typically performs a credit inquiry, either a hard or a soft inquiry. A hard inquiry, common when applying for a loan, can temporarily lower your credit score by a few points. However, the impact is typically minor and short-lived.
The exact decrease in your credit score due to a hard inquiry can vary depending on your overall credit history and the specific credit scoring model used by the lender.
The good news is that the negative effect of a hard inquiry tends to diminish over time, and responsible financial behavior can help offset it. In the long run, a hard inquiry’s impact on your credit score is relatively small compared to other factors like payment history and credit utilization.
To answer the question, ‘What is the benefit of obtaining a personal loan?’ We can say that numerous benefits abound. Beem can help you find, compare options, and choose the best personal loan to meet your needs.
FAQs
Q. What is the best reason for a personal loan?
A. The reason for obtaining a personal loan often depends on your unique financial circumstances and goals. Some common valid reasons include debt consolidation, home improvement, medical expenses, education expenses, and major purchases. The key is to use a personal loan to achieve a specific financial objective or improve your financial situation.
Q. What are the advantages of a personal loan over a credit card?
A. Personal loans offer several advantages over credit cards, including lower interest rates, fixed monthly payments, higher borrowing limits, and the ability to consolidate high-interest debt. Personal loans are often a more cost-effective option for significant expenses or debt consolidation. At the same time, credit cards are better suited for everyday purchases and building credit.
Q. Is getting approved for a credit card or personal loan easier?
A. The ease of approval for a credit card or a personal loan depends on your credit history, income, and the lender’s specific requirements. Credit cards may be easier for individuals with limited or fair credit. At the same time, personal loans may require a higher credit score and income. However, approval criteria can vary significantly among lenders, so it is always advisable to compare offers.
Q. Do personal loans affect credit usage?
A. Yes, personal loans can affect your credit usage. When you take out a personal loan, it adds to your total outstanding debt. This can impact your credit utilization ratio, a significant factor in your credit score. However, if you use the personal loan responsibly and make on-time payments, it can positively impact your credit score, as this would demonstrate responsible credit management.
Q. Does a personal loan improve your credit score?
A. A personal loan can improve your credit score if you make on-time payments and manage the loan responsibly. Timely payments demonstrate your ability to handle credit responsibly, which is a positive factor in your credit history. However, late payments or defaulting on the loan can hurt your credit score, so using personal loans wisely and within your means is essential.
Q. What credit score is needed for a personal loan?
A. A personal loan’s required minimum credit score varies by lender. Generally, a FICO score of 620+ is considered fair to good and qualifies for many lenders. For the best rates and terms, a 700+ score is recommended. Lenders also assess income, employment history, and debt-to-income ratio.
