Debts often get a bad rap in this consumer-driven era. But let’s face it – only a few earn enough to pay cash for big, essential purchases like a home, a car, a college education, or a small business. While it’s possible for an average person to live debt-free, it’s not necessarily a smart decision, as you can easily take out loans today to get the best out of life.
A personal loan is one of the types of loans that work to your advantage. Below are six benefits of personal loan that makes it a favorable option for smart borrowers.
1. No collateral required
A personal loan is usually an unsecured loan, meaning you don’t have to put your personal property or asset on the line just so you could borrow. You don’t have to worry about the lender, seizing your collateral to recoup their money should you fall behind on your payments. The payment for the personal loan is also done through fixed monthly installments with interest.
Unsecured loans are supported by your income and creditworthiness or repayment capability. When you have good credit, you’re more likely to be approved and be offered a lower interest rate.
2. Flexible and multi-purpose
As its term suggests, personal loans are taken out for a variety of personal reasons. Unlike an auto loan, mortgage loan, and home equity loan which are marked for a specific purpose, personal loans offer a flexible option to fit most situations.
The golden rule is to use it prudently, like using it for sending children to college, financing a small business or expansion, and paying for a medical procedure. You may also use personal loans for a home improvement project. Although taking out a home equity loan would allow you to pay lower interest rate, you won’t be putting your house as collateral when using a personal loan.
3. Lower interest than most credit cards
When it comes to convenience, credit cards got you covered during emergency situations. Just swipe the powerful plastic card and you’re good to go. The main disadvantage of credit cards is they are high-interest loans. It’s not unusual to pay around 15% Annual Percentage Rate (APR) on a credit card balance
Personal loans offer lower interest than most credit cards, especially if you have good credit. You may qualify for a loan with a 6% APR and that makes a huge difference.
4. Paying off high-interest credit card debts
Since personal loans have a lower interest rate, they can be used to pay off a high-interest debt, like a credit card. It can reduce the total amount of interest paid. It also has a fixed term, which can set an end date for payments. Personal loans help you pay off what you owe more rapidly while saving money on interest.
5. Consolidating or refinancing debts
One of the most popular uses of a personal loan is for debt consolidation. It refers to combining other debts, like credit cards, payday loans, and car loans, into just one loan with a fixed rate, fixed monthly installment, and closed-end term. Debt consolidation can be helpful if you’re struggling to pay on time or if you’re having a difficulty keeping track of each account.
6. Quick and easy application and disbursement
Personal loans are offered by all financial institutions and banks. Chances are, you have already received several phone calls from your bank representative regarding your qualification for personal loans. They also require minimal paperwork and verification time with respect to checking the documentation.
The total process from application to disbursement is quicker, easier, and simpler compared to other loan types, making them favorable for emergency funding.
When NOT to take out a personal loan
Bad debt is a debt incurred to buy things that rapidly lose their value and do not produce long-term income. It goes without saying that you should never use a personal loan for a bad debt.
Just because personal loans can be used for whatever reason, doesn’t mean it’s okay to use it for non-essential consumer purchases, like a wedding, a luxurious vacation, an expensive gadget, or a second car that depreciates fast. At the end of the day, you’re still using borrowed money and you’re still paying interest.
Author Bio: Sophie Harris is a resident writer for QuickCash, an Australian-based business, providing quick cash loans and payday loans for one’s short-term borrowing needs. Writing informative content about business and personal finance is her cup of tea.