Accumulating debt is commonly viewed as a negative thing. But that doesn’t have to be the case. Personal loans, when managed responsibly, can assist borrowers in making major purchases or handling unexpected events. They can even improve your overall financial situation and advance long-term financial goals.
Like any loan, a personal loan requires strategic planning and financial diligence to stay on top. Unlike many types of loans, the structure of a personal loan makes it simple and easy to handle while keeping your financial situation in order.
You may be wondering what are the benefits of obtaining a personal loan that traditional loans do not offer, and we are here to answer that today. In this article, we’ll discuss how personal loans can advance your financial goals and the advantages of getting a personal loan so you can decide if it is the right option for you.
Why Do People Take Out Personal Loans?
There are many reasons why more individuals are turning to personal loans over other alternatives today. Personal loans are money borrowed from a bank, credit union, or licensed lender that you can contribute to virtually any project you desire.
You pay them back in fixed installments including fees and interest rates, over a predetermined period of months or years. Predictable repayments make it easy for individuals to borrow large sums of money and manage debt responsibly. The flexibility of personal loans means they are a popular vehicle to advance other financial goals, such as consolidating debt or improving your credit score for bigger loans down the line. Whatever your reason, a personal loan can be a great way to get the money you need quickly and easily.
Debt Consolidation
If you’re looking to consolidate high-interest debts into a single manageable loan, getting a personal loan could be the perfect solution. Consolidating your debt means combining several different debts into one larger loan. This can make it easier to manage your payments and can often save significant costs on interest rates. For example, an unsecured personal loan can be a lifesaver for those who need high-interest credit card debt consolidation.
There are a few things to keep in mind when consolidating debt with a personal loan. First, ensure that your loan lender is offering lower interest rates than your other debts. Otherwise, you could end up paying more in interest overall. Second, devise a plan to keep you disciplined and accountable for making repayment installments on time. If you miss a payment, you could damage your credit score or end up paying more in interest.
Cover Unexpected Expenses
When you need a lump sum to cover large purchases and emergency expenses, acquiring personal loan funds can be a great solution. The following are some examples of circumstances people may take out a personal loan for:
- Unanticipated medical bills
- (Large projects) such as a wedding or vacation
- Urgent home improvement projects or repairs
- Emergency funds
To Overcome Barriers To Other Loan Qualifications
Many people take a personal loan to get around high conventional loan qualifications. For example, when you take out a mortgage loan, you put up your home as collateral. Additionally, you must supply specific financial documentation to qualify for the loan, and you’re obligated to put the money towards the home you borrowed against. But with a personal loan, you are not required to borrow against collateral, making it a great way to get the money you need without putting your home (or other collateral) on the line.
There are a few alternative loans to high conventional loan qualifications. If you’re trying to obtain a mortgage loan and are battling strict qualification barriers, The Mortgage Shop offers innovative and flexible conventional loans. Get in touch today – we are happy to take a look at your situation and see what you may qualify for.
[NOTE. We spoke about uncertainty regarding TMS financial products. As I understand TMS offers secured loans for mortgages. I invite you to please advise whether this CTA needs to be adjusted, and if so, please state in which ways the information can more accurately reflect the client’s business.]
Types of Loans
While looking for a loan, you’re likely to encounter a few different types. Here is an overview of a few different types of loans to help us contextualize the benefits of a personal loan.
- Secured loan – A secured loan is a debt secured by collateral, such as your home or car. When you apply for a secured loan, a lender will ask which of your assets you will back the loan with. The lender will then place a lien on the loan until the debt is paid back in full.
- Unsecured loan – Personal loans are unsecured, which means you don’t have to put up any collateral like you would with a home or car loan.
- Fixed-rate loan – A fixed-rate loan is a type of loan where you agree to pay the same interest rate for the entire life of the loan. This can be helpful if you know that you won’t be able to afford higher payments in the future, as it will keep your monthly payments stable. It’s important to note that while a fixed-rate loan offers predictability, it also means that you may end up paying more interest over time if rates go down.
- Adjustable-rate loan – An adjustable-rate loan is a type of personal loan where the interest rate can change. This means that the amount of money you have to pay back each month can also vary, making your repayments unpredictable.
So what are the benefits of obtaining a personal loan? Let’s dive in and find out!
Benefits of Obtaining A Personal Loan
They Offer Flexibility
When it comes to flexibility, personal loans can’t be beaten. With other types of loans, like mortgages or car loans, you’re typically locked into using the money for a specific purpose. Mortgage loans must repay homes, student loans pay for academic tuition and educational supplies, and motor loans must pay back vehicles. On the flip side, with a personal loan, you can use the money for anything you want – from home repairs to travel expenses.
With fast approval times and no collateral required, it’s easy to get the money you need deposited into your bank account. And since personal loans come in all shapes and sizes, you can find one that fits your specific needs.
You can also access flexibility with how you choose to manage your loan repayment schedule. This could result in a longer repayment term with reduced monthly payments or a shorter repayment term with higher amounts to limit the impact of interest. Credit cards offer flexible terms to borrowers too, though they often impose strict credit limits, which brings us to the next nice-to-have of a personal loan.
Higher Borrowing Limits
Personal loans typically offer a higher borrowing limit than alternatives like credit cards. With a personal loan, individuals can easily borrow $5k-$10k, and in many cases even more if they have a good credit score.
For example, you might be able to borrow up to $30,000 with a personal loan, while your credit card limit might be only $5,000. This can be a big advantage if you need a large sum of money fast.
Credit cards are often effective for small unexpected debts. But when you require larger quantities of money, a personal loan will better cater to your needs.
Faster Access To Cash
When you apply for a personal loan, you can often get access to the money very quickly. This is because personal loans are unsecured, meaning you don’t have to put up any collateral like you would with a home or car loan.
A financial institution can approve loans rapidly, and often this can happen even faster if you have a good credit score and predictable income.
Lower Interest Rates
Personal loans tend to have a lower annual percentage rate (APR) than credit card debt and other types of loans. This is one reason they are so popular for consolidating debt. It also makes them less expensive to pay off in the long run.
Even a few degrees of change in the lender’s APR can make a huge difference in interest repayments over the long term. For example, let’s say you borrow $10,000 for four years at a 10% interest rate. Your monthly repayments will be about $254. If your APR was 15% and nothing else about your loan changed, your monthly payments would be $279. The total difference in interest payments made after four years would be $1,185, which adds up.
Additionally, when you opt for a higher interest rate with a credit card, you may accumulate compounding interest, meaning that you pay interest on your interest. If you miss a monthly payment or cannot pay the outstanding amount back in full, you risk continued compounding interest, meaning your credit card loan balance will continue to grow and grow.
Predictable Repayment Schedule
Many personal loans come with fixed rates. When you take out a personal loan, you know how much interest you have to pay back on what principle and over which term. Therefore you typically have a predictable repayment schedule.
Unlike adjustable-rate loans, you know exactly how much you need to pay each month and when you need to pay it. This stability can help planning your budget and stay on track with your payments. It also helps protect your credit score, as missing a payment could cause your score to drop.
Personal loan terms are generally simple and easy to understand: they have fixed repayment amounts and do not come with missed installment penalties. This simplicity can help alleviate the financial stress of variable loan repayments. The only situation that may incur fees is delinquency (if you are consistently behind on payments), which is easy to avoid when you can plan your budget around fixed installments from the beginning.
Build Your Credit History
Looking further down the line to a scenario where you need a good credit score, a personal loan is a great way to achieve this. When you can regularly pay back your loan on time, your lender will likely take notice and send your data to credit bureaus, improving your overall credit score over time.
Timely installments demonstrate that you are responsible for repaying borrowed money. Many situations in the future may require a good credit score, and well-managed personal loans can positively contribute to them!
What Do I Need To Qualify?
Qualification measures will vary from lender to lender, so it’s best to check directly with your prospects first. In general, here are a few factors that lenders look out for:
Credit Score
When you take out a personal loan, the lending institution will likely give you a limit based on your credit score and income. This limit is the maximum amount that you are allowed to borrow. If you need more money than what’s offered, you can always reapply for a higher limit.
While having a high credit score will give you a better chance of getting approved for a personal loan and getting a lower interest rate, it’s still possible to qualify for a loan with less-than-perfect credit. So if you need cash and have less-than-stellar credit, don’t rule out a personal loan just yet!
Income
Your income is a key factor that lenders look at. To qualify for a personal loan, borrowers need to demonstrate that they can afford the monthly payments. Your income will be one of the main factors lenders use to determine whether you can afford a personal loan.
When assessing your income, lenders look at a few different things, including your employment history. They want to see that you have a steady income and that you’re likely to continue to have a steady income in the future.
Debt-to-Income Ratio (DTI)
Debt to income ratio is a figure many financial lenders use to determine whether you’re likely to be able to repay your debt obligations. It is expressed as a percentage and gets calculated using your income and total debt.
This is your total monthly debt obligation divided by your net monthly income. Here is what the equation looks like:
Monthly Debt / Monthly Income = DTI
So let’s say Johnny earns a net salary of $2,000 per month. He pays $300 monthly off his car loan and $230 from his student loan, equaling a total of $530 in monthly debt. Let’s plug in those numbers:
530 / 2000 = 0.265 = 26.5%
Lenders typically want to see a debt-to-income ratio of 40% or less. Because Johnny’s DTI is only 26.5%, a lender may let him qualify for the loan. In general, those with a steady, regular income and a low DTI are likely to be approved for a personal loan.
Final Thoughts
Nowadays there are increasing reasons for personal loans to serve just about anybody. While the prospects of acquiring debt may send some running for the hills, a personal loan offers a financial solution focused on helping borrowers manage their loan payments with ease.
Most personal loans are relatively easy to acquire, have fixed interest rates and repayment schedules, and can help build a positive financial history to support future financial goals. As with any secured or unsecured loans, obtaining a personal loan requires the borrower to have a structured repayment plan and some financial sense.
If you’re looking at taking out a personal loan to help you get around stringent mortgage qualification barriers, The Mortgage Shop may be able to help you. We are committed to offering innovative financial solutions to help you get into your home faster and easier. Get in touch with the best mortgage broker today to find out whether you qualify!
