Personal loans are less expensive financial option in certain situations
By: Hitesh Khan/
There are many reasons when getting a personal loan may be a better than allowing your financial crisis to spiral out of control. In other situations, personal loans are rarely a good choice. When and whether we take personal loans is dependent on many factors.
When should you get a personal loan?
Personal loans are often the best option for people who are in a crisis situation in which they need the money quickly, and can’t get it from savings, family, or friends. In this situation, a personal loan is a much less expensive financial option than a credit card cash advance.
A personal loan is also a better financial option to having your car repossessed or your house foreclosed for a missed payment, leaving a friend or family member in jail for lack of bail, or facing whatever other crisis you may be confronted with.
For non-crisis situations, personal loans are rarely the best financial option – though they are usually still better than credit cards. You should generally only turn to personal loans if you really need the money and cannot get it from your savings, family, home equity loan, or another source that charges less interest – in short, if your only alternative is a credit card.
Personal Loan or Home Equity Loan?
Personal loans are far more expensive than home equity loans. But there’s one advantage of personal loans that is not often discussed: they’re ultimately less risky. Unlike home loans or car loans, personal loans are not usually secured – meaning there is usually no collateral for the lender to seize if you default.
If you are in a financial crisis now, you have to keep in mind the possibility that your troubles may be compounded by another financial crisis in the future. In short, if your finances get worse and you can’t pay back your personal loan, at least no one will auction off your house.
How Are Personal Loans Better Financial Option than Credit Cards?
If you walk into a bank and ask for a personal loan, they may push you towards a credit card instead. But personal loans are probably better for you, precisely because on average you will end up paying less to the bank. Do your research and stand your ground if pressured to apply for a credit card instead of a personal loan. After all, it is your money.
Similarities between Personal Loans and Credit Cards:
- Interest rates tend to run around 18% to 28%.
- Typically unsecured – that is, you don’t have to put up collateral.
- The amounts of money involved are typically a few thousand dollars or less (and sometimes even as less as $500).
Advantages of Personal Loans over Credit Cards:
- Personal loans have a fixed repayment period, with a pay-off date you can look forward to. Of course, you could force yourself to pay off your credit cards within a fixed period. But with a loan, the repayment period is based on a contract, rather than will power, so payoff success rates are much, much higher.
- Credit cards are a revolving line of credit. Personal loans are installment loans, like mortgages. When you make a payment you do not suddenly free up an equivalent amount of credit you can charge against. This is another reason why, practically speaking, the average person is likely to end up getting out of debt faster with a loan.
- Personal loans have a set interest rate that cannot normally be raised at the whim of the lender. Credit issuers often raise the interest rates of customers who approach their credit limits—another reason the banks usually prefer giving out credit.
If you have a bad credit history, you will have a hard time getting a personal loan at a competitive interest rate. Of course, having had trouble with credit in the past may be a particularly good reason to avoid personal loans in the first place.
In the end, the best advice about personals might be not to get one unless you absolutely have no other choice except credit cards. If a personal loan really is your best financial option, make sure to follow all the tips above when researching where to go.
How to Secure Personal Loans Quickly
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