What is a personal loan and why would you want one?

A personal loan is one that you would normally borrow from a bank, credit union or online lender.  You would repay the loan for a predetermined time period in fixed monthly payments. Payments usually last for 2 – 7 years.

Why would you want one?  First, they don’t require collateral.  They’re unsecured unlike an auto loan that is secured by the vehicle.  The interest rate is fixed so your payments won’t change for the life of the loan.  You know exactly long it will take to pay the loan off.  And, you can use it for a bunch of different reasons.  Think about home repairs, medical bills, debt consolidation, a major purchase such as a large appliance, or an emergency.  (I recommend an emergency fund instead of taking a loan).

There are some reasons you might want to take one out.  I like the idea of debt consolidation because the interest rate should be much lower than your credit card company rates.  You know exactly how much you’ll pay each month and for how long.  Your credit scores will go up assuming you pay on time each month.  And, you can usually get quick approval and funding.

On the negative side, if your credit scores suck, your interest rates may be high.  Some lenders may charge what’s called an origination fee.  That’s a one-time charge you’ll pay to the lender to cover their costs of creating and giving you your loan.  Finally, if you miss any payments, your credit scores could suffer.

Moral of the story:

Do I recommend getting a personal loan?  Well, as you know by now, I’m loan adverse.  However, if you can consolidate your credit debt at a much lower interest rate and pay it off more quickly, I might give it a go.  Just be aware that you need to make your monthly payment and never get behind.  If you can’t do that, forget it.