What is a personal loan?
A personal loan is a type of financial assistance provided as a one-time large sum, which is then paid back in monthly installments. These loans have set annual percentage rates (APRs) and repayment schedules. They can vary from $600 to $200,000, although on the LendingTree platform, the maximum loan amount is $50,000. Personal loans with APRs under 36% are generally deemed affordable by financial experts.
Personal loans can be either secured or unsecured. Secured loans need collateral, a valuable asset that ensures the loan will be repaid. If the borrower fails to repay the loan, the lender has the right to take the collateral. On the other hand, unsecured loans do not require collateral, so lenders examine your credit history more thoroughly before granting the loan. The majority of personal loans are unsecured.
Why You Might Consider a Personal Loan
Personal loans offer a versatile credit option that can be utilized for nearly any expense. However, your interest rates and loan terms may vary depending on what you intend to use the funds for.
- Debt Consolidation: If you're finding it hard to handle your debt, consistently make payments on time, or simply wish to consolidate various accounts, a debt consolidation loan could be a suitable option.
- Consolidating Credit Card Debt: You could save a significant amount of money in repayments by settling your credit card debt with a personal loan that has a lower interest rate.
- Loans for Home Improvements: Homeowners often face a range of costs. A personal loan can provide the necessary funds in the short term without negatively impacting your long-term financial health.
- Loans for Large Purchases: Personal loans can cover a wide range of anticipated and unforeseen expenses, such as wedding expenses, relocation costs, vehicle repairs, medical expenses, and other large purchases.
Hike in Fed Interest Rates in 2023
Due to the ongoing inflation in the US, the Federal Reserve has once again raised interest rates in July 2023, setting the target rate at 5.25%-5.50%. This is the eleventh time the rates have been increased since March 2022. The latest hike is the steepest since 2001, and it is anticipated that the Fed will continue to raise rates in 2023.
Implications for individuals: The variable interest rates on credit accounts, such as credit cards, might increase. However, personal loans have fixed interest rates, so there should be no changes to your existing payments. But for those planning to apply for a new personal loan, be prepared for potentially higher interest rates.
As the Fed continues its fight against inflation, it is likely that interest rates will keep climbing.
Advantages of Personal Loans
Personal loans come with a range of advantages that make them stand out from credit cards and other loan types, including:
- One-time payment: When you secure a personal loan, the lender will transfer the total loan amount to your bank account. This means you get the full amount upfront, unlike a credit card where you borrow from a credit line.
- Stable APR: Personal loans have fixed APRs, unlike credit cards and personal lines of credit that usually have variable APRs. This ensures that your minimum monthly payment remains the same, regardless of market fluctuations.
- No collateral needed: Most personal loans are unsecured, meaning you don't need to provide collateral. If you default on your loan, you won't lose any property, but your credit score will be affected.
- Defined repayment period: Personal loans have a specified repayment term, so you know exactly when you'll be debt-free. Unlike credit cards and similar options, which don't have a set term, potentially leaving you repaying your debt for years if you only make the minimum payments.
- Loan purpose flexibility: Borrowers can use their loan funds for a variety of purposes, from financing a wedding to covering an emergency expense. However, most lenders do not allow the use of personal loans for business or post-secondary education purposes.
