There are so many types of loans to choose from, finding the best type of loan for your needs can be a challenge. Loans are not a one-size-fits-all product and the best loan type for you will depend on personal factors, such as your risk tolerance, income, objectives and your credit history.
When evaluating what type of loan to take out, some people forget to consider personal loans. This is unfortunate because personal loans offer many advantages, particularly for borrowers with less-than-prime credit scores. Topping the list of advantages is the fact that they tend to provide a much safer and more affordable alternative to predatory sources of credit, such as payday loans, credit card cash advances, pawn shops and auto title loans.
Never considered a personal loan before? Here are five reasons you should give them a second look.
1. Personal Loans Have a Fixed Interest Rate
While personal loan interest rates vary depending on your credit score, they offer the important advantage of a fixed interest rate. Many types of loans and credit card advances are legally allowed to increase your interest rate after you take the loan. And often these increases are based on factors completely outside of your control, such as a fluctuation in an underlying index rate such as LIBOR or the prime interest rate or some other nebulous industry ‘risk factor’.
Even a seemingly small change in your interest rate can quickly increase your monthly payments as well as the overall cost of your loan that can severely mess up your financial stability in a heartbeat.
With personal loans, once the loan agreement is signed, the interest rate does not change for the duration of the loan. That’s a huge advantage if piece of mind and financial predictability matter to you.
2. Personal Loans Require No Collateral
In addition to the pricing advantages, personal loans are also typically a safer option for borrowers, especially in regards to retaining your personal property.
For example, with an auto title loan you are effectively transferring ownership of your vehicle to the lender until the loan is repaid. In the case of pawn shops you don’t only transfer ownership but also the possession of the security until you repay the loan.
Personal loans, on the other hand, do not require collateral or any kind of security. If unforeseen circumstances cause you to default, the lender will most likely report you to the credit reporting bureaus, for sure. But at least you’ll avoid the more extreme forms of collection — such as levies on your bank accounts, a repo man in your driveway or losing your family’s heirloom jewelry.
3. Personal Loans Have Fixed Installments and a Set End Date
Unlike credit cards and payday loans, personal loans have fixed installments and a set end date on which the loan is repaid. This arrangement helps reduce the financial risks that are inherent in the open-ended payment plans that come with credit card advances, payday loans and other loans with extendable payment schedules.
With credit cards the monthly minimum payment may increase depending on the balance on your card or other facts– and because it’s so easy to withdraw more and more money until you reach the card’s limit, many people fall into a deep and vicious cycle of debt.
Payday loans manage to compound the worst aspects of both the fix-payment and flex-payment options by first a requiring lump sum payment (often within an unrealistically short, two-week period) that can easily transform into a hard-to-escape spiral of “rollover fees” that ensnares folks who can’t afford to repay the loan in-full within the initial timeframe.
4. Personal Loans Offer Better Interest Rates
Although the interest rates of personal loans vary, they are almost always cheaper than payday loans.
This may not be immediately obvious on the surface because payday loans obfuscate their interest rates and overall costs through a labyrinth of loopholes and jargon designed to hide the loan’s true cost.
Let’s say you take out a payday loan for $350, pay the $50 fee, and manage to repay the $350 by the end of the two weeks period. The annualized interest rate will be 372.45%. And if you happen to be one of the millions of people who fail to repay your payday loan within two weeks — thus triggering “rollover fees” — and the loan’s APR can quickly exceed 1,000%.
5. Personal Loans Don’t Require Good Credit
Personal loans are typically available to borrowers with excellent and poor credit alike. So while certain loans, such as peer lending loans, also offer viable options for some borrowers, they’re almost exclusively available only to those with fairly good or excellent credit. So if your credit score is not above 640, you’re often not even eligible for consideration.
Net-net: As mentioned in the introduction, you must honestly evaluate your personal circumstances to determine what is the best choice for you. All said, personal loans offer many benefits, particularly for folks who have had financial or credit score setbacks. So the next time you’re evaluating your options for borrowing money, remember to consider personal loans. It may very well be your best option.