Sometimes unexpected expenses occur that are larger than your emergency fund. When this happens, you might have to borrow money to pay the bills. Unless you can borrow money from friends or family, chances are, you might have to apply for a personal loan from your bank. Before filling out the loan application, here are several things to consider regarding personal loans.
What is a Personal Loan?
Personal loans are a financial product that charge interest rates higher than auto or student loans on the low-end and lower than credit cards on the high-end of the spectrum by charging interest rates that range from 5 percent to 15 percent depending on the applicant’s creditworthiness and amount borrowed. A personal loan can be used to pay for nearly any expense, but, are most commonly used for medical bills, home repair or debt consolidation. They are normally unsecured (no collateral required), can charge fixed or variable interest rates, have fixed repayment periods (i.e. 36 months, 48 months, 60 months, etc.) and can borrow anywhere from $ 1,000 to $ 50,000.
It is possible to also obtain a secured personal loan. Applicants with low credit scores might only qualify for a secured loan. This type of loan requires the borrower to use the equity of a possession such as a car or house to act as a “security deposit” in case the payments cannot be made. A positive benefit of secured loans is that they normally offer lower interest rates compared to unsecured personal loans.
Any personal loan is going to charge interest and temporarily lower your credit score. Depending on the amount you need to borrow, it might make sense to exhaust your own personal assets before taking out a personal loan. Some things to consider might be looking at you emergency fund, savings account or any investments you might own. If you can pull from savings, it can be cheaper to pay yourself back $ 5,000 at 0 percent interest instead of the bank at 10 percent interest over three years.
When To Apply For A Personal Loan
Personal loans are the most flexible loans available. Here are times they make sense.
Consolidating Debt: A personal loan can be a good idea when you want to consolidate debt from loans or credit cards that charge higher interest rates. There are credit cards that offer 0 percent introductory rates on balance transfers for the first 12 to 18 months the account is opened and then charge an interest rate of 15 percent to 20 percent on any remaining balance. In this instance, it makes sense to pay down the credit card debt as much as possible during the grace period and transfer the remaining balance to a personal loan before the credit card company starts charging interest.
Medical Bills: Another time personal loans make sense is paying medical bills as it is one of the leading causes of personal bankruptcy. A personal loan can provide a lifeline that quickly provides cash and allows you to continue receiving treatment. If you cannot negotiate a repayment schedule with the care provider or insurance company, a personal loan is the best option as it is cheaper than simply charging the bills to a credit card, a more expensive form of personal debt.
When Not To Apply For A Personal Loan
There are the obvious reasons when not to apply for a personal loan such as college or buying a car. It might not make sense to apply for a personal loan when you expect the following expenses.
Home Remodeling: You might get a better interest rate with a Home Equity Line of Credit (HELOC) or a Home Renovation Loan that allow you to borrow against your house equity. It’s possible to get an interest rate as low as 3 percent and have more time to repay the loan. If you qualify for a HELOC, you can use the funds as you desire for any purchase just like a personal loan. You need to be a homeowner who might be mortgage-free, but this is usually a more affordable option in most cases.
Vacation: It is perfectly acceptable to use a personal loan to pay for the annual family vacation, but is it a responsible use of your money? You still might be making payments when it comes time to buy Christmas presents and the debt can snowball going forward and vacation might be unaffordable next summer.
Choosing the Best Personal Loan
Nearly any local bank offers personal loans, but there are also several national lenders. Here is a good list of the most popular companies. As with any loan, you should search for one that offers the lowest interest rate and also doesn’t charge application fees, origination fees or prepayment penalties. Regarding interest rates, it might be better to go with a fixed rate, as key interest rates are projected to gradually increase in the near future if you will need several years to repay the loan.