The Pros and Cons of Taking Out a Personal Loan
When considering taking out a personal loan, it’s essential to carefully weigh the pros and cons before making your decision. Furthermore, take into account how this borrowing option could affect your credit score if this option is chosen.
Similar to any financing, a personal loan can either help or hurt your credit score depending on how you use it. Repaying off debt responsibly and practicing responsible money management will keep your credit in excellent standing.
Interest rates have the potential to have a profound effect on your financial life, from major purchases to everyday savings goals. While you cannot control interest rates, there are steps you can take to minimize their effects.
Finding a competitive personal loan rate requires doing your due diligence and researching the true costs of loans you apply for. Lenders use several factors to calculate interest rates, including your credit score and income.
Borrowers with excellent credit, high and stable income, little existing debt, and a history of timely payments on other loans typically receive the lowest rates.
In addition to your overall interest rate, lenders will also add a percentage of your loan balance in fees. This number is your annual percentage rate or APR and can be an effective tool in negotiations with potential lenders.
If you’re considering taking out a personal loan, it’s essential to be aware of the fees that could accompany it. Fees aren’t just an inconvenience; they also affect the overall interest rate you’ll pay over the life of your loan.
Lenders charge origination fees on personal loans to cover the expenses of processing your application, verifying your income and marketing their services. These fees vary by lender but can range anywhere from 1% to 8% of the total loan amount.
Some lenders charge late payment fees for payments that are past due, in order to incentivize people into making their payments on time and reduce the risk of defaulting on a loan.
Fees typically are flat-rate, with a maximum of $25 or $50 for one-time payments and 3% to 5% for percentage-based fees. Some lenders also provide payment protection insurance; though not required, it can be an appealing option if you’re worried about not being able to make your loan payments in case of an unforeseen emergency.
Selecting the ideal repayment period is critical in the personal loan process. It will affect your monthly payments, interest rates, and other factors.
Generally, shorter loan terms offer you greater savings in interest costs over its duration. However, a longer term can also have its advantages and drawbacks.
To determine whether an additional expense is worthwhile, carefully weigh its advantages and drawbacks and confirm that you can afford it.
If you need a quick solution for an expensive expense like a wedding or funeral, or need to pay off debt quickly, taking out a short-term loan with higher payments could be worth considering.
But if you need to improve your credit score or increase your debt-to-income ratio, a longer repayment term could negatively affect your finances. Furthermore, if you decide to pay off the loan early, there may be an added charge for prepayment which would add an expensive fee onto each monthly payment.
Your loan amount will depend on a few factors, such as your credit score and debt-to-income ratio, along with which lender you select.
Loan amounts can range anywhere from several hundred dollars up to $100,000 or more, depending on the lender. Generally speaking, most lenders cap out at $50,000 as the maximum personal loan amount available.
Though loan limits differ by lender, they generally serve to guarantee borrowers have enough financial cushion to make their monthly payments.
An increased Hamilton personal loan amount can help cover larger expenses like home repair or an unexpected medical bill. However, only take out the maximum amount if it makes financial sense for you.
To determine how much you can borrow, get prequalified with a lender and determine your rates. With Credible, you can get personalized rate estimates and prequalified loan amounts in just two minutes!