No matter how responsible people are with their money, most will eventually come to a point where they need extra cash to pay for a large purchase. When that happens, a personal loan is often the first choice. Read on to find out about a few of the benefits of taking out a personal loan that could help to explain the popularity of this financial product.
High Borrowing Limits
For most people, the simplest alternative to applying for a signature loan is credit cards. While applying for a new credit card is sometimes a viable option, that’s not the case when borrowers need to make large purchases. Personal loans generally have higher borrowing limits, which makes them a better option in those circumstances.
Relatively Low Interest Rates
Borrowers should expect to pay interest on any debt they carry, whether it comes in the form of a credit card or a personal loan. Interest rates vary depending on a consumer’s credit score, but for personal loans, they generally start at around five percent. Credit cards, on the other hand, often charge interest rates in the double digits.
No Collateral Required
Unsecured personal loans aren’t the only option for getting one lump sum of cash for people who own homes or other assets. However, they are the only option that doesn’t require putting up collateral. Defaulting on a personal loan still has adverse consequences but it won’t lead to the loss of property, as would be the case with a secured loan.
Ease of Application
Applying for a home equity loan, mortgage, or other secured loan can be difficult. These financial products are only offered by traditional lenders, many of which have strict eligibility criteria and complicated application processes. Applying for a personal loan is a simple matter of filling out an application online and providing some basic proof of identification and income.
Predictable Repayment Schedule
Personal loans are installment loans, which means that borrowers will have fixed repayment terms. They’ll know how much each payment will be, how much of it goes to paying off interest vs. paying down the principal balance, and how long it will take to pay off the loan from the very beginning. This predictable repayment schedule makes it easier to budget effectively.
Build Credit History
Technically, any kind of loan or line of credit can be used to build a credit history. Lenders report payment activity to Experian, Equifax, and Transunion, which means that making on-time payments helps borrowers build stronger credit histories and boost their credit scores. Of course, the opposite is also true. Missed payments can hurt credit scores when borrowers take out any kind of loan, as well.
If there’s one thing that draws people toward personal loans compared to other types of financial products it’s that they can be used for almost any purpose. Many borrowers use personal loans to consolidate debt or pay for things like emergency medical bills. However, it’s just as common for people to use personal loans to pay for pre-planned major purchases like funding home improvements, financing weddings, buying land, or even going on vacation.
The Importance of Finding the Right Lender
There are plenty of options available for borrowers with good credit who want to take out personal loans. However, people with less than excellent credit scores may be better off exploring options outside of traditional banks and credit unions. Online lenders often offer the best rates for bad credit personal loans.