If you need extra funds, a personal loan may be a good option to explore. While many loans, like auto loans, boat loans, and home loans, must be used for a specific purchase, the funds from a personal loan can be used for just about anything (however certain restrictions may apply, depending on your lender).
What Is a Personal Loan?
Personal loans are commonly used to consolidate debt, cover medical expenses, or pay for a big purchase like a wedding or vacation. Most personal loans are unsecured which means that you don’t need to put up collateral, such as your home or car, in order to take out the loan. However, in some cases a personal loan can be secured by something you own. BankFive, for instance, offers secured personal loans that can be backed by your savings account or CD account. These loans can provide the funds you need without having to drain your savings, and they can also be a good way to help rebuild your credit. Secured personal loans are typically easier to get approved for than unsecured personal loans, and they often have lower interest rates as well.
Pros of Personal Loans
Some advantages of personal loans include:
- Flexibility. You can use the money for a variety of purposes.
- Fast Turnaround. The application and approval process for personal loans is generally pretty fast, especially compared to other financing options like home equity loans or cash-out refinancing.
- Potential for Credit Score Improvement. Making on-time payments for your personal loan over the course of the loan can help improve your credit score.
- No Collateral Required. With unsecured personal loans, you don’t have to put your home or car at stake. While failing to pay back the loan can cause extreme damage to your credit score and put you at risk of litigation, the lender can’t foreclose on your home or repossess your vehicle like they can with mortgage loans or auto loans.
- Lower Interest Rates Compared to Credit Cards. Personal loan interest rates are generally lower than credit card rates. This is why personal loans are a popular choice for people looking to consolidate and pay off credit card debt.
Cons of Personal Loans
It’s also important to understand the potential disadvantages of personal loans:
- Higher Interest Rates Compared to Other Options. While personal loans typically carry a lower interest rate than alternatives like credit cards and payday loans, they’re not the least expensive option. In most cases, you can obtain a lower interest rate with a home equity loan or line of credit, or a secured collateral loan.
- Fees and Penalties. Many personal loans include upfront fees and penalties for repaying the loan early. It’s critical to read the fine print before agreeing to a loan. The good news is that unsecured personal loans from BankFive do not have a prepayment penalty.
- Higher Monthly Payments than a Credit Card. Since most personal loans are billed in monthly installments that include both principal and interest, you must pay the full fixed amount each month. With a credit card you have the flexibility to pay only the minimum amount due. However, it’s important to note that while paying only the minimum payment on a credit card might seem convenient, it can lead to growing debt and out-of-control interest charges.
Is a Personal Loan Right for Me?
Ultimately, the decision of whether or not to take out a personal loan will depend on your unique financial situation and your current financial needs. Before taking out a personal loan you should first consider whether any less expensive forms of borrowing are available to you and ensure that you can afford the loan’s monthly payment. Keep in mind that you should have a specific purpose in mind for the loan funds. It’s a poor idea to take out a personal loan just because you want extra cash in your pocket.
If you are a Massachusetts or Rhode Island resident who is interested in a personal loan, contact us, or apply online today. We have both secured and unsecured personal loan options to meet your needs.