According to Finder.com, the primary reason borrowers take out a personal loan is to help with vehicle-related expenses, followed closely by the need to stay on top of bills. While you wouldn’t take out a personal loan to buy Nashville real estate, many use them to make emergency repairs on their home, perhaps a serious plumbing issue or to fix a leaky roof.
With a personal loan, you borrow a certain amount of money for a certain period of time, paying it back in monthly installments. These loans are often unsecured, which means you don’t have to put up your house, car or other collateral. The interest rate on the loan is based on your credit score and history. They’re available through credit unions, traditional banks, online banks, and online bank lenders like SoFi or a peer-to-peer lender like Lending Club.
A personal loan can be a good option, but as with most things, they come with both pros and cons.
Pros
Consolidating debt. Taking out a personal loan can be a great debt consolidation option if you’ve racked up high amounts of credit cards and are paying high-interest rates on them. It essentially allows you to refinance, lowering your interest rate and monthly payment. When all those bills pile up, so does the stress, and a personal loan interest rate is usually much lower than that for a credit card. For example, if you’re paying off multiple credit card bills with a personal loan, the overall total you’ll pay will be less.
Another advantage is that you’ll have a set amount for a specific length of time, with a clear beginning and end to getting rid of that debt, providing a light at the end of the tunnel.
There’s No Risk to Your Personal Property. As personal loans are usually unsecured, you won’t have to worry about your personal property being at risk in the event you default. There’s no worry over losing your car, home or other assets if you get laid-off and are unable to make those monthly payments.
It’s Quick and Easy. The process for applying for a personal loan is much easier than if you were to apply for a mortgage or home equity loan. You’ll get a quick decision as to whether you’re approved, and the money usually shows up in your bank account within a few days. You can apply from the comfort of your own home with an online bank or peer-to-peer lending site – approval depends on your credit score and history, and you’ll also need to be able to provide proof of a stable income.
Cons
Interest Rates are Higher Than Some Other Loans. An unsecured personal loan is riskier than a loan secured with collateral, so higher interest rates are charged. That rate depends on the amount of money and your credit score. You may have upfront fees as well, like application and loan origination fees – sometimes a portion of the higher interest rate is hidden within those. It’s important to make sure the monthly payment is within your budget as these loans often come with high late payment penalties too.
Garnishments and Credit Damage. While the loan isn’t backed by personal property, if you default on it, the lender might sue you in court and secure a lien on your assets to secure repayment. If that happens, you could be forced not only to pay the amount you borrowed plus late fees, but court costs and attorney fees. That would also result in a significant negative impact on your credit score and potentially having your wages garnished