Personal loans have become increasingly popular in America over the years, and for good reason. They offer people a way to access funds quickly, without having to put up collateral or undergo a lengthy application process.
However, like any type of loan, personal loans come with their own set of advantages and disadvantages. In this article, we’ll explore the growth of personal loans in America and delve deeper into the advantages and disadvantages of this type of loan.
We’ll also discuss situations where personal loans can be a good option, the qualifications needed to obtain a personal loan, and reasons why you may want to consider taking out one.
Growth of Personal Loans in America
According to Experian, a credit reporting agency, the average personal loan amount has increased by nearly 20% since 2016. In the first quarter of 2020, the average personal loan amount was $16,259.
This growth is due to several factors. Personal loans are flexible, meaning you can use them for a wide range of purposes, including debt consolidation, home repairs, and medical bills.
Additionally, personal loans typically come with fixed interest rates and predictable payment schedules, which can make budgeting easier.
Advantages and Disadvantages of Personal Loans
One of the biggest advantages of personal loans is that they are unsecured, meaning you don’t have to put up collateral like a car or house. This is good news for people who don’t have a lot of financial means.
Additionally, if you have a fair-to-good credit score, you may be eligible for a personal loan with a lower interest rate than you would get with a credit card. However, there are also disadvantages to taking out a personal loan.
For one, the interest rates can sometimes be higher than other types of loans, such as a home equity loan. Additionally, if you default on a personal loan, your credit score will take a hit.
Finally, the amount of money you can borrow may be limited by your credit score and debt-to-income ratio (DTI).
Situations When Personal Loans Can Be a Good Option
Debt Consolidation – personal loans can be a great way to consolidate high-interest debt like credit card bills, medical bills, and other bills with high APRs. By consolidating these bills with a personal loan, you can often get a lower interest rate and a predictable payment schedule, which can make it easier to pay off your debt. Emergency Home Repair – if you need to make a small repair on your home, like fixing your furnace or water heater, a personal loan may be a good option.
Unlike a home equity loan, which requires you to put your home up as collateral, a personal loan doesn’t require any collateral. This can be especially useful if you don’t have a lot of equity in your home or if you only need a small amount of money.
Unexpected Medical Bills – personal loans can also be useful if you have an unexpected medical bill, like an ambulance ride, surgical procedure, or dental work. If you don’t have insurance, or if your insurance doesn’t cover the full cost of the procedure, a personal loan can help you cover the costs.
Moving Costs – if you’re moving from one place to another, you may need to cover expenses like packing materials, transportation, rentals, deposits, storage, and new furniture. A personal loan can help you cover these costs, especially if you’re moving to a new city or state and don’t have a lot of savings.
Paying Down Credit Cards – if you’re struggling with high-interest credit card debt, a personal loan can help you pay off your debt more quickly. Personal loans often come with lower interest rates than credit cards, which means you can save money on interest and pay off your debt faster.
Building Credit – if you’re trying to build your credit score, a personal loan can be a good way to diversify your credit history. By taking out a personal loan and making timely payments, you can show lenders that you’re financially responsible and increase your credit score.
Veterinary Bills – if you’re a pet owner, you know that veterinary bills can be expensive, especially if your pet needs life-saving treatment. If you don’t have insurance or if your insurance doesn’t cover the full cost of the treatment, a personal loan can help you cover the expenses.
Funeral Expenses – if you’ve lost a loved one and need to pay for end-of-life expenses, like a funeral or cremation, a personal loan can help you cover the costs. Some lenders offer specific funeral expense loans, which can help you cover the costs without having to put up collateral.
Qualifications for Personal Loans
To qualify for a personal loan, you typically need a credit score of at least 580 and a DTI of less than 50%. If you have a higher credit score and a lower DTI, you may be eligible for a lower interest rate.
Additionally, lenders will look at your income and employment history to determine whether you can afford to make the payments.
Conclusion
Personal loans can be a helpful tool for accessing funds quickly and easily, but they come with their own set of advantages and disadvantages. By understanding the qualifications needed to obtain a personal loan and the situations where personal loans can be a good option, you can make an informed decision about whether a personal loan is right for you.
Remember to always read the fine print and compare lenders to ensure that you’re getting the best interest rate and terms possible. Personal loans have become increasingly popular among consumers due to their accessibility and flexibility.
Traditional banks, credit unions, and online lenders all offer personal loans, making it easy for consumers to find a source that fits their needs. However, in order to qualify for a personal loan, there are certain criteria that applicants must meet.
In this article, we’ll explore the different sources of personal loans, the qualifications needed to obtain a personal loan, and important considerations to keep in mind before taking out a personal loan.
Sources of Personal Loans
Consumers have several options when it comes to obtaining a personal loan. Traditional banks, credit unions, and online lenders all offer personal loans, each with their own set of advantages and disadvantages.
Traditional Banks – Traditional banks are a reliable source for personal loans. They often have stricter criteria for approval, but they may offer lower interest rates for those who are approved.
Credit Unions – Credit unions are not-for-profit financial institutions that offer lower interest rates to their members. They may also be more willing to work with borrowers who have lower credit scores.
Online Lenders – Online lenders are a newer source of personal loans and often offer more flexible borrowing options. They may not have the same strict approval criteria as traditional banks or credit unions, but their interest rates may be higher.
Credit Scores and Debt-to-Income Ratio
One of the most important factors in qualifying for a personal loan is your credit score. Most lenders require a fair credit score of 580 or higher for approval.
A higher credit score typically means a lower interest rate, which can save borrowers money over the life of the loan. Another important qualification factor is the debt-to-income ratio (DTI).
To calculate your DTI percentage, divide your total debt by your total income. Most lenders prefer a DTI of less than 50%.
A lower DTI means you have a better chance of being approved for a personal loan.
Credit Reports
Lenders will also take into consideration your credit report, which includes information from the three major credit bureaus: Experian, Equifax, and TransUnion. It’s important to check your credit report for accuracy and make sure that all of the information is up to date.
Errors on your credit report can impact your credit score and your chances of being approved for a personal loan.
Considerations for Personal Loans
Before taking out a personal loan, it’s important to consider how it will impact your financial outlook. Adding a monthly payment to your budget may affect your ability to pay other bills and expenses.
It’s important to calculate how much of a monthly payment you can afford before taking out a personal loan. Additionally, personal loans can have both positive and negative effects on your financial means and credit score.
On the positive side, making timely payments on a personal loan can improve your credit score and show lenders that you’re financially responsible. However, on the negative side, if you default on a personal loan, your credit score will be negatively impacted.
Additionally, unpaid personal loans can be sent to collections, which can further impact your credit score and make it more difficult to qualify for future borrowing.
Conclusion
Personal loans can be a helpful tool for accessing funds quickly and easily, but it’s important to carefully consider your financial situation and qualifications before taking out a loan. By understanding the sources of personal loans, the criteria for approval, and the considerations involved in taking out a personal loan, you can make an informed decision about whether a personal loan is right for you.
In conclusion, personal loans can offer a flexible and accessible way to obtain funds quickly and without collateral. However, before taking out a personal loan, it’s important to qualify by meeting criteria, such as credit scores and DTI percentages.
Checking credit reports for accuracy is also essential to secure a loan with optimal conditions. It’s crucial to fully consider the impact a personal loan may have on your budget and financial outlook as it can impact future borrowing.
Overall, understanding the sources, qualifications, and considerations involved in taking out a personal loan can help make an informed decision that positively impacts one’s financial situation.