Paying off debt is one of the many obstacles people face today. Many have considered taking a personal loan to pay off their current debt with higher interest rates. If you’re unsure about taking out a personal loan, continue reading to see if a personal loan is right for you.
What Is A Personal Loan?
There are two types of loans, secured and unsecured loans. A secured loan is a type of loan that requires you to provide collateral to the lender which makes it less risky for lenders. For the borrower, a secured loan is risky since you risk losing your asset.
A personal loan is categorized as an unsecured loan. The main difference with an unsecured loan is that you’re not required to provide collateral to the lender. Since collateral is not required, the lender considers you a risk. With that said, the interest rate on a personal loan will be higher. When it comes to personal loans, there are a few things to keep in mind. Personal loans usually come with fees and also have APR’s.
The APR on your personal loan will be based off these factors:
- Credit History
- Credit Score
- Annual Income
- Debt-To-Income Ratio
- Loan Terms
- Employment History
Is A Personal Loan Right For You?
Before considering a personal loan as your best option, there are a few things to consider.
1. Loan Amount
Before considering a personal loan, evaluate how much debt you need to pay off. Only borrow what you need to get you out of debt and nothing more. Remember why you’re doing this in the first place. Personal loans typically allow you to borrow between $1,000 and $50,000. Keep in mind that your credit score and income will affect how much you’ll be approved for.
2. Monthly Payments
It’s important to validate your current monthly payments. Taking a personal loan will affect your monthly payment; it can either be lower or higher. Make sure you shop around to find the personal loan that puts you in the best financial situation. It’s possible to lower monthly payments, even with all your combined debt. The rate on your personal loan can be lower than your current rates.
3. Repayment Term
The repayment term on a personal loan typically varies from 1 to 7 years. This can benefit you depending on your financial situation. If you need more time to pay off the loan, you have the option. In the opposite scenario, your term can be shorter than the time it takes to pay off your credit card. Most importantly, determine whether or not you’ll be able to pay off of the loan by the end of the term. If it’s not affordable, a personal loan may not be for you.
4. Credit Score
As mentioned earlier, your credit score is an important factor. If you have a high credit score, you’ll have a better chance of securing the best interest rates. On the other hand, a bad credit score will result in higher interest rates. Even if you have bad credit, you can still qualify for a personal loan. But that doesn’t mean it’s right for you. You’re better off working on improving your credit score to acquire the best interest rate. Don’t make your situation worse and add more debt.
When You Should Consider A Personal Loan to Tackle Debt
A personal loan may be tempting, but there’s always a right place and a right time. Being financially responsible will help you tackle debt and help you in the long run. So when is best to consider a personal loan?
1. Debt Consolidation
Don’t forget, a personal loan will ease your problems but not solve it. If you find yourself in the best position for a personal loan, consider debt consolidation. The interest rate on your personal loan can be lower than all of your combined debt. With a lower interest rate, you can save money with less accrued interest over time.
2. Good Credit Score
A personal loan can be a great option if you can the best rate. A personal loan is not recommended especially if you have bad credit.
3. APR
If your APR is lower than your current interest rates on your debt, you can reduce the total amount of debt owed.
4. Repayment Term
If the repayment term is affordable for you, consider a personal loan. In many cases, the repayment term will help tackle debt faster than your ongoing monthly payments on your credit card.
Here’s the bottom line, personal loans can help you tackle debt. But it’s up to you to make the right decisions. Fix your spending habits and make better financial decisions. If you decided that a personal loan is right for you, take this time to fix your spending habits.
Resources:
1. https://www.moneyunder30.com/personal-loan-debt-consolidation
2. https://www.marketwatch.com/story/is-a-personal-loan-the-best-way-for-you-to-tackle-debt-2019-06-27
