Editor's choice: Credible personal loans
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A personal loan might not be an obvious choice if you’ve never before borrowed money for anything other than school. But a loan can help you avoid taking on other kinds of debt that are more difficult to repay. Watch out for situations where it might not be the best option, however.
A personal loan is money you borrow in one lump sum — typically between $2,000 and $50,000 — from a bank, credit union or online lender. You can use a personal loan for most legitimate personal expenses and to consolidate your debt, though some lenders won’t allow you to apply the funds toward education or investments.
Personal loans are useful tools that can help you save money and time when you’re juggling existing debt, facing specific types of bills or looking to leverage improved credit.
A top reason borrowers take out a personal loan is to consolidate and pay off credit card debt. Debt consolidation involves taking out a personal loan in the amount that you owe on your existing credit cards and using the funds to pay off your creditors, ideally at a lower rate than the average you’re paying today. You repay your loan with fixed monthly repayments over a set period of time — usually three to seven years.
Because personal loans typically have lower interest rates than credit cards, you can save on unnecessary interest. If you consolidate two or more bills, you also simplify your life by paying one monthly payment to one lender.
If your credit score has improved or you’re making more money than you did when you originally took out an existing loan, you might be able to save money by refinancing.
Refinancing involves taking out a new personal loan to pay off a loan you already have in your name. While many borrowers refinance to take advantage of a more favorable rate, you can also refinance to take a cosigner off your loan or lower your monthly repayments.
You need to buy a plane ticket, but you don’t have the time to save up for it. Or maybe you need to relocate for a new job, but you don’t have the savings on hand.
In these cases, a personal loan can help you get funds you need to take advantage of an opportunity. While it’ll cost you more than paying up front, that once-in-a-lifetime adventure or more lucrative job could outweigh what you’ll pay in interest.
A personal loan isn’t always the best choice for covering the costs of an upcoming medical procedure. But if your only other option is in-house financing, you might find a better deal with a personal loan provider.
Ask your medical provider about its in-house rates and terms before you shop around to make sure you’re getting the most competitive offer you’re eligible for.
Not all lenders allow you to use a personal loan to pay for school — but some do. In fact, providers like Boro specialize in offering personal loans to students to help cover extra expenses that crop up. And because they typically can’t benefit from a student loan on their own, personal loans are often international students’ only financing option.
Taking out a loan to make home repairs can actually save you money in the long run. That’s because essential repairs can actually increase the value of your home. This ups your net worth and can get you a better deal if you’re interested in selling.
A personal loan can offer lower rates than credit cards and other forms of debts. But it might not be the best solution under a few key circumstances.
Have your eye on a luxury item or feeling the itch for an exciting vacation? If your needs aren’t immediately, you might want to work out how much your repayments would be and save that amount each month instead. Otherwise, you could be paying for your splurge many years later.
Are you thinking of borrowing for home improvements or another investment? Make sure it’s bound to add value in the long run, otherwise you could be left paying interest on an improvement that ultimately lost you money.
Even if you want to consolidate debt or fix up your house, taking out a personal loan might not be the best idea if your credit score has recently taken a hit. You might not be able to qualify for competitive rates and terms — or at all with some lenders. And if you’re interested in debt consolidation, you might get even higher rates than you had before.
Taking out a personal loan when your finances are unsteady could hurt you in the long run. It can also be difficult to qualify for a competitive rate if you don’t have a steady full-time job, since many lenders consider your employment when you apply. Self-employed applicants can also have a difficult time qualifying with some online lenders, since it can be difficult to provide proof of income.
Not necessarily. While a personal loan can improve your credit if you make on-time repayments, it’s not always the cheapest way to do so. If you’re able to qualify for a credit card on your own, paying off your purchases before your next payment is due is a cost-free way to improve your credit rating.
Don’t yet have a credit score? Many credit unions and local banks offer small-dollar loans to build your credit. These credit-builder loans come low interest rates, but most lenders place the funds in a locked savings account that you can’t access until you’ve fully repaid the loan.
You can also sign up for a service that reports your bill payments to the credit bureaus to help you build your credit score.
Ready to take out a personal loan? Follow these strategies to narrow down the right one for your situation.
You can read about even more ways to finance your personal expenses by checking out our article on personal loan alternatives.
A personal loan is a valuable tool that can help you cover a large one-time expense you can’t put off or consolidate multiple debts. But at the end of the day, you’re still borrowing money with interest. Make sure the benefits outweigh any drawbacks for your situation.
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