Whether you’re working to build financial freedom through debt consolidation or want to improve your credit mix, personal loans can provide a path forward. Did you know getting — and paying off — a personal loan can even help build your credit score? Read on to understand the benefits of obtaining a personal loan and how you can use debt constructively to reach your financial goals.
What is the Main Benefit of a Personal Loan?
Personal loans are a very desirable option for everything from debt consolidation to credit building. You can use personal loans, including government loans, to leverage funds to achieve your financial goals or build toward bigger targets. Here are the main personal loan benefits:
1. Debt Consolidation
Personal loans can be used to consolidate high-interest debts, such as credit card balances or other loans. By combining multiple debts into a single loan, you can simplify your finances and potentially secure a lower interest rate, reducing the overall cost of borrowing. This can also make it easier to pay off debt and reach other financial targets.
2. Lower Interest Rates
Personal loans usually have lower interest rates than credit cards or other types of unsecured debt. If you have good credit, you may qualify for a personal loan with a more favorable interest rate, resulting in potential interest savings over time.
3. Flexible Use of Funds
Personal loans are typically unsecured, meaning you can use the funds for various purposes without specifying how you will spend the money. Whether home improvements, medical expenses, education costs or a major purchase, a personal loan provides flexibility in using the borrowed funds. With lower rates than credit cards, this is a better way to make a large purchase you can’t pay for with savings.
4. Fixed Repayment Terms
Personal loans usually have fixed repayment terms, meaning you’ll know exactly how much you need to pay each month and the date when the loan will be fully repaid. This can help with budgeting and financial planning, as you’ll have a clear timeline for debt repayment.
5. Improve Credit Mix
Credit mix is one of the factors that influence your credit score. Adding a personal loan to your credit mix can diversify your credit portfolio, potentially boosting your credit score as long as you make on-time payments to manage the loan responsibly.
6. Enhance Credit History
Consistently making on-time payments on a personal loan helps build a positive credit history and demonstrates your creditworthiness to lenders. A strong credit history can open doors to better loan terms and lower interest rates in the future.
7. Quick Access to Funds
Personal loans often have a faster approval process than other types of loans, such as mortgages. A personal loan can provide relatively quick access to necessary cash if you need funds urgently for a time-sensitive expense or unexpected emergency.
8. No Collateral Required
Personal loans are typically unsecured, meaning you don’t need to provide collateral such as a house or car to secure the loan. This reduces the risk of losing assets in the event of default.
9. Building a Relationship With a Lender
By taking out a personal loan from a reputable lender and repaying it responsibly, you can establish a positive relationship with the lender. This may make obtaining future loans easier or help negotiate better terms with the same lender.
10. Flexible Repayment Options
Personal loans often offer flexible repayment options, allowing you to choose the loan term that best suits your financial circumstances. Longer loan terms can result in lower monthly payments, while shorter terms allow for faster debt repayment.
11. Potential Savings on Interest
If you have high-interest debts, such as credit cards or payday loans, consolidating them into a personal loan with a lower interest rate can save significant money in interest payments over time.
How To Decide When To Get a Personal Loan
Reasons to get a personal loan, as the name implies, are personal and highly unique. Whether it’s the right time to get a personal loan depends on your needs. Common times to consider a personal loan include:
- To reduce interest payments and consolidate credit card or other high-interest debt
- For major necessary expenses, from home renovations to medical expenses
- To improve credit mix when building credit for a larger loan like a mortgage
- If you carry several debts and prefer consolidating them into a single payment
You’ll need a good to excellent credit score to get a personal loan with favorable interest rates and terms. If you’re using the loan to build credit, choose a smaller personal loan with a shorter repayment period to demonstrate financial responsibility while paying off the loan sooner. If you have credit card debt, compare personal loan interest rates to credit card interest rates to determine the best available options.
A personal loan isn’t a replacement for building savings and investing to create financial freedom. But in case of emergency expenses or while working to pay off debt, personal loans can be a tool to manage expenses and get out of debt faster. Check out the best personal loans, the best personal loans for excellent credit or the best bad credit personal loans.
Frequently Asked Questions
When should I obtain a personal loan?
You should obtain a personal loan for debt consolidation to reduce interest payments on debt or if you’re considering a large, necessary expense like a home remodel before selling or medical expenses.
What is a personal loan, and how does it differ from other types of loans?
A personal loan is a loan or debt product offered by banks, credit unions and online lenders. Personal loans are usually unsecured, although in some cases, they are secured. Loan repayment times range from one to seven years and can be used for almost any expense.
How can I obtain a personal loan, and what are the requirements?
To obtain a personal loan, you must supply information like your government-issued ID, Social Security number and proof of income. Lenders will check your credit score and debt-to-income ratio. You might be asked to pay an origination fee or provide collateral for the loan.
About Alison Plaut
Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.