Personal Loans: Top Benefits and Eligibility Requirements
6 min read
Posted on April 12, 2022
The question has been asked many times, but what would you do if you had a sudden, unexpected $400 emergency arise? Whether you need a little extra cash flow for a major purchase, an emergency expense or a personal project, such as home improvement, you might be wondering about the benefits of personal loans.
Personal loans may be beneficial for several reasons. Plus, you’ll find that many lenders offer flexible loan amounts, terms and eligibility.
What Is a Personal Loan?
A personal loan sounds just like what it is — it’s a loan meant for personal use that can include a number of use cases, which vary by lender. Personal loans have permissible purposes and various repayment periods. They can be used for a variety of things, including home improvement projects, consolidating debt and more.
You could receive a personal loan from most credit unions, banks and online lenders. However, your credit history through the credit bureaus will be evaluated during the loan application process.
Typical personal loan amounts range from $5,000 to $7,500. The average personal loan amount in 2021 was just over $7,000.
After you receive your loan proceeds, repayment begins soon after. You’ll make monthly installment payments to pay down the loan until you’ve satisfied your debt entirely.
What Are the Benefits of a Personal Loan?
In addition to being able to cover an unexpected expense, there are many other potential benefits of obtaining a personal loan. For instance, certain purchases could be better made with a personal loan than with your current finances, depending on your financial situation and current credit report.
Personal loans may be a good choice for certain goals — and not so much for others. For instance, if you own your home and you’re considering making major improvements, a personal loan may be a viable option. Remodeling your kitchen, expanding a bedroom or bathroom or adding on a completely new room are all reasons you might need a little extra cash without dipping into your savings.
Some of the benefits of using personal loans may include:
- consolidating high-interest debt.
- building your credit score.
- financing large purchases.
- funding emergency expenses.
A personal loan may even help improve your financial situation in certain instances — on-time payments on your loan could boost your credit score, too. But be prepared to make your loan payments on time each month, so you don’t damage your credit score.
Consolidate Your High-Interest Debt
High-interest debt. It’s a bad word for many financially struggling individuals who haven’t considered personal loan benefits. Many individuals have no choice but to turn to high-interest credit cards and car loans to get the financing they need.
A personal loan may come in handy for paying off these types of high-interest debt. A personal loan could consolidate these debts into one, easy-to-manage monthly payment with a potential lower interest rate, allowing you to pay off the high-interest debt in one lump sum.
If you can obtain a personal loan with a lower interest rate and a similar repayment term, you could be able to save some money on your overall loan costs. Debt consolidation can help make your monthly payments easier to manage. Instead of having two or more credit card payments every month, you can have one single payment on your personal loan.
Build Your Credit Score
Taking out a small personal loan and repaying it according to its terms could boost your credit score, depending on your overall credit profile. It’s important to make your monthly payments on time.
If you have a little bit of credit history, a personal loan may be a way to beef up your credit score, even a little bit. Opening any new loan or line of credit will be reflected on your credit report.
Some of the aspects that are reflected in your credit history include the age of your open accounts, how many credit inquiries you’ve had and how well you pay back your debts.
So, if you have a personal project or a large purchase upcoming, you could consider a personal loan to help you cover these costs. As long as you make your payments on time, you could improve your credit score by the time you’ve paid off the loan.
Finance Large Purchases
Your savings is for the future, for retirement or for emergencies, right? So, digging into your savings when a large purchase presents itself isn’t always doable or advised. You may not have to dig into your retirement to take that bucket list vacation, buy a new car or plan your child’s wedding. Some lenders may allow personal loans to be used to finance car purchases, weddings and even vacations.
A personal loan is one way to make a large purchase without breaking the bank. Sure, you might pay a bit more in the long run (even if you avoid high-interest rates), but you won’t have to stress about coming up with a large amount of money in a short period of time. Many people use various types of personal loans to fund large purchases and then pay off their purchases over time.
Fund Emergency Expenses
This last benefit may remind you of the situation we mentioned in the beginning — many individuals and families find that coming up with $400 for an unexpected expense is difficult, if not impossible.
Many people struggle with building an emergency fund, so when you get unexpected expenses like medical bills or need to fix something in your home, finding the money can be stressful. You could use a personal loan from a bank or financial institution to fund emergency expenses without completely draining your bank account. This is one option if you find yourself struggling to save money for your emergency fund, but it should be considered carefully. After all, you will still be required to make monthly payments on the loan balance.
What Are the Potential Drawbacks of a Personal Loan?
None of the potential benefits noted above mean that personal loans are perfect: there are some potential drawbacks that will affect each person differently. It’s important to consider these before making the decision to take out a personal loan.
Some of these drawbacks include:
- interest charges. Your loan will be accruing interest from the time you take it out until you pay it off. You will typically wind up spending more money on the initial loan amount after interest charges are added to the total.
- additional fees. Many loan offers include additional fees like an origination fee that you will be responsible for paying. Additionally, pending on your lender, you may face prepayment penalties if you pay off the loan too quickly.
- damage to credit score. If you are not making your monthly payment on time, a personal loan could hurt your credit score. It’s important to carefully consider how these drawbacks might affect you and your personal finances before you decide to take out a personal loan.
It’s important to carefully consider how these drawbacks might affect you and your personal finances before you decide to take out a personal loan.
Frequently Asked Questions About Personal Loans
How is a personal loan different from a credit card?
A personal loan is a lump sum of cash given to you by a financial institution. You are required to make a monthly payment to pay down the balance until the loan is paid off.
Credit card accounts give you a limit to spend on the card. Additionally, your credit card balance will impact how much your monthly bill is. The payment amounts may not be consistent every month.
With a personal loan, once you’ve repaid the loan in full, you no longer have to pay the monthly payment and the loan is closed — with a credit card, even if you max out the card (spend all the funds on it) after you pay off the balance, you’ll then have access to your full credit limit again.
Another difference between credit cards and personal loans is that credit cards can have a higher annual percentage rate, while personal loans may have lower rates, which is one of the potential benefits of personal loans. Learn more about personal installment loans and credit cards from the Consumer Financial Protection Bureau.
What is the difference between a secured and unsecured personal loan?
A secured loan has some form of collateral attached to it. Borrowers are required to put up a valuable piece of collateral against their total loan amount. This could be a car, home, or certificate of deposit. This collateral serves as a promise or security that the borrower will repay all funds lent — if you don’t repay this type of loan, the lender can confiscate your collateral and use it to recoup the loan proceeds.
An unsecured loan does not require collateral, but it will usually have a higher interest rate. The actual interest rate you’ll be approved for depends on several factors, such as your credit score and the types of previous activity listed in your credit history. Learn more about secured versus unsecured loans from the Consumer Financial Protection Bureau.
Can you get a personal loan with bad credit?
You may be able to get a personal loan if you have bad or poor credit, but the loan amount will depend on the lender you choose and their specific lending requirements.
Usually a higher score makes it easier to qualify for a loan and may result in a better interest rate. Most credit scores range from 300-850, according to the Consumer Financial Protection Bureau. Someone with good credit or excellent credit may be offered lower rates on personal loans and potentially be offered a higher loan amount, whereas someone with little to no credit or poor credit scores might be offered a lower loan amount at a higher interest rate. If your credit doesn’t permit you to obtain a personal loan, you could ask a trusted friend or family member to be your cosigner.
What can you use a personal loan for?
A personal loan can be used for many different things — the only catch is that lenders need to know why you’re asking for funding. Some lenders have specific restrictions on what you can use a personal loan for. For instance, some lenders don’t offer personal loans to be used for student loans, for down payments on a house or for business expenses.
Secure Your Personal Loan Through Splash Financial
With many potential benefits of personal loans it’s easy to forget there are some drawbacks depending on your specific financial situation. You should carefully consider all aspects of any loan terms presented to you before making a final decision. Learn more about personal loans through Splash and check out today’s rates.
The information provided in this blog post is not intended to provide legal, financial or tax advice. We recommend consulting with a financial adviser before making a major financial decision.