3 Main Advantages of Personal Loans
When you need to borrow money, there are some options out there for you. You can get a home equity loan, take a cash on your credit card or seek out a payday lender. But one option, a personal loan, has some advantages over the other options. Here are the three main advantages of getting a personal loan.
No collateral needed
Probably the biggest advantage of getting a personal loan is that you don’t have to secure the loan with any type of collateral. When you get a home equity loan or a title loan on your car, the loan is secured by the house or car, which the lender considers collateral. That means that if you don’t pay back the loan, the lender can seize your collateral. That makes home equity loans and other loans where property or other assets are used as collateral “secured” loans. Personal loans, by contrast, are considered unsecured loans, because there is no collateral to secure the loan. That means the lender is relying only on your promise to repay the loan. That’s why personal loans require high credit scores and carry higher interest rates than secured loans.
Lower interest rate than other unsecured loans
Because personal loans are unsecured, they carry higher interest rates than secured loans. But they typically have lower interest rates than other types of unsecured loans. For example, if mortgage rates are around 3-4 percent, personal loans will likely carry rates that are about double that, anywhere from 6-9 percent. While that sounds high, it is still much lower than other types of unsecured credit. Credit card rates typically don’t go much lower than 10 percent and can be higher on cash advances. Payday loans typically have one-time fees that in some cases run into the triple digits when calculated as an annual interest rate.
Set monthly payments
Another advantage with personal loans over other types of unsecured credit is monthly payments that are set and predictable. Just like with a mortgage or car loan, a personal loan has a monthly payment schedule with set payments each month for a prescribed term. Credit cards have a small minimum payment, and you can pay more if you want, but what you pay each month dictates how long you will have the debt and now much in financing costs you pay. Payday loans typically have to be paid back all at once and in one lump sum.
When you need a loan, it is worth it to consider a personal loan, thanks to the many advantages they offer compared with some other types of loans.