When Does a Personal Loan Make Sense?
There are loans designed for a specific borrower need. An auto loan is used to buy a new car. Home loans help borrowers purchase properties. Student loans are used for college or graduate school. Business loans are specifically for business purposes. However, there are individuals whose financial needs don’t neatly fall within such categories. For them, a personal loan may be the right financing option for their situation. It can often provide the flexibility borrowers are looking for to fund life events, achieve personal goals, or simply improve their financial situations.
Understanding a Personal Loan
Before exploring the situations in which a personal loan makes sense, let’s take a moment to define this type of financing. A personal loan may also be called a consumer loan. It is offered by a bank, credit union, or other lender to an individual for personal use. In most cases, the borrower will make fixed monthly payments for a set period of time, typically two to five years. Unlike other loans, the money from a personal loan can generally be used for just about any legal purpose.
Secured or Unsecured
Most personal loans are unsecured and don’t require collateral. The lender does not ask that an asset be used to secure the loan. However, in some cases, a secured personal loan can be obtained with an asset such as a savings account or car serving as the collateral. The interest rate on a secured personal loan will typically be lower than that on an unsecured loan. Whether the loan is unsecured or secured can be based on the loan amount, the borrower’s needs, the program offered by the lender, or the borrower’s financial situation.
How the Process Works
Applying for a personal loan is fairly easy. In many cases, it can be done completely online — with the option to speak with a representative, if necessary. After a short application is completed, the lender will review your information and do a soft credit inquiry — which won’t affect your credit score. If there aren’t any issues, you will receive a preliminary offer with the loan terms. If you accept this offer, the lender will ask for documentation to confirm your ID, income, and bank account. The last step in the process is for the lender to pull a complete credit report before depositing the loan funds into your designated bank account. The whole process can often be completed in a few days.
Benefits of a Personal Loan
Based on the borrower’s individual needs and requirements, personal loans may offer the following benefits:
Lower interest rates than other forms of credit.
No requirement for collateral from the borrower.
Short loan terms — anywhere from 2 to 5 years.
No limit on the use of the loan funds.
Credit scores are not affected by initial inquiries.
Common Uses of Personal Loans
The interest rates available on personal loans are typically lower than the rate paid by borrowers on their existing credit cards. Because of this, personal loans are frequently used by borrowers to consolidate the debt on multiple high-interest credit cards into one monthly payment at a lower interest rate. The interest saved each month can then be applied to the balance to help pay the debt off faster. This is not isolated to only credit card debt. Any debt that is at a high interest rate would be a candidate for this strategy.
Home Improvements or Repairs
When it comes to home improvements or repairs, there are situations in which a personal loan may be a better option than a home loan. If you don’t have equity in your property, a home loan often is not an option. A personal loan can make sense in this situation. In addition, if you don’t need a large amount of money or you’re looking to get funds quickly, a personal loan may also be the right fit.
Major Purchases or Expenditures
Personal loans can help with large purchases or expenditures, such as weddings, moving expenses, large family vacations, and even medical expenses. Obtaining funding through a personal loan rather than a credit card for these purposes can provide benefits. Often the interest rates available through a personal loan are lower than the rate on a credit card. In many cases, personal loan limits are higher than those associated with credit cards. In addition, the set monthly payment amount of a personal loan makes it easier to budget and pay off the debt faster.
There are times when a traditional auto loan is not an option. A personal loan can be the solution when you want to buy a used car for a teenager, purchase the classic car you’ve dreamed about, or fund the restoration of a salvaged vehicle to its former glory. Unlike an auto loan, you won’t be asked for a down payment. Not limited to just cars, you could also use the funds from a personal loan to buy a boat, snowmobile, motorcycle, waterski, or accessories.
Financing Hobbies and Side Businesses
Personal loans can be used to finance personal matters including hobbies, personal projects, and small business ideas. Hobbies such as writing, bird-watching, or hiking may not require much money. However, if you are into photography, exotic pets, or travel, a personal loan can help you finance your passion. Plus, if your hobby turns into a profitable venture or you feel the need to scratch an entrepreneurial itch with a small side business — a personal loan can be the right option. Because the lender considers only your personal credit score and income to determine your eligibility, you can avoid the unnecessary complexity and commitment of a business loan. You may also benefit from a lower interest rate and no collateral requirements.
The next time you are evaluating your loan options — don’t forget to explore personal loans.
Personal loans can be a valid solution for many borrowers, especially those whose needs fall outside the rigid standards of a traditional mortgage, auto loan, or business loan. In addition, personal loans make sense when you need money quickly, want a short loan term, or desire set monthly payments. Although they may not be as well known as other loans, personal loans provide the flexibility many borrowers want as a short-term solution to their financing needs.
You can explore our Personal Loans page to learn more about the features and benefits available through a loan with Axos Bank.
When Does a Personal Loan Make Sense?
This blog post was published by Axos Editorial Team on March 12, 2019 and last updated on March 12, 2019