All You Need to Know About Personal Loans
Personal loans, sometimes called unsecured loans, are loans that allow flexible use, offer short- to moderate-term repayment options and quick funding. Their versatility and convenience make them a popular choice for borrowers of every financial standing. Let’s take a deeper look at personal loans, how they work, and their pros and cons.
How personal loans work
If you’re interested in taking out a personal loan, visit your credit union in person or online to complete an application. Pending approval, you can walk away with the lump sum you requested, typically within one to three business days. You’ll need to repay the principal of the loan, along with interest, over the loan’s term, which can be as short as six months or as long as seven years, depending upon your lender.
Unlike most other loans, like home loans and auto loans, personal loans are not intended to be used for a single, specific purpose. Once the money is in your hands, you are free to use the loan in any way you please. Some popular uses for personal loans include:
- Funding an adoption
- Covering medical bills
- Paying off credit card debt
- Covering a large purchase of any kind
- Paying for a dream vacation
- Funding a wedding
Personal loans are an easy and convenient way to get a lump sum of cash quickly for almost any possible use.
Pros of personal loans
There are some distinct advantages to borrowing money through a personal loan.
First, as mentioned, personal loans provide the borrower with the unique freedom to spend the funds in any way they choose. The lender won’t ask to see evidence of how the money was spent, nor will they care to know. The borrower has full discretion over the money.
Second, applying for a personal loan tends to be a lot faster than applying for most other loans. You’ll need to have a decent credit score and provide proof of income, but if your finances are in order, approval can happen in 24 hours or less.
Also, if you have debt from other sources, personal loans offer an opportunity to consolidate into one easy-to-manage payment. If you have debt from multiple sources, such as other loans or credit card balances, you may be facing several different interest rates, due dates, and fees. By consolidating with a personal loan, you can simplify all that into one monthly payment. And, depending upon your credit score, you may be able to move your debt to a lower interest rate, which may allow you to save money and pay off what you owe faster.
Cons of personal loans
There are some disadvantages to personal loans that borrowers should be aware of before going ahead with an application.
First, as unsecured debt, personal loans that are not backed by any collateral will likely have a higher interest rate than loans borrowed against an asset, like a home or a car. The most recent data on the national average interest rate on unsecured loans is 9.28% APR* for credit unions and 10.21% for banks. In contrast, the nationwide average interest rate on 60-month new car loans is just 3.45% for credit unions and 5.10% for banks. It’s a good idea to run the numbers to be sure you can comfortably meet the monthly payments before finalizing a personal loan.
Also, even if a personal loan is unsecured, a lender may be able to place a lien on the borrower’s assets if the borrower is delinquent in their payments. While this only occurs in extreme cases, and the lender must sue the borrower in court before they can obtain a lien, it’s important to be aware of this possibility. If it indeed occurs, the borrower could be stuck paying attorney fees and court costs in addition to the loan amount and late fees.
Finally, the amount of money you can borrow through a personal loan may be significantly less than the sum you can borrow through other loans. The exact amount you can borrow will depend on your creditworthiness, but as a general rule, when debt is not secured, the amount you can borrow is smaller. Find out how much you’ll be qualified to borrow before you decide to apply for a personal loan.
If you’re ready to take out a personal loan, call, click, or stop by today! With our competitive rates, Scott Credit Union’s loans offer qualifying members a convenient and affordable way to borrow a large sum of cash quickly.
* APR = Annual Percentage Rate.
Your Turn: Have you recently taken out a personal loan? Tell us about it in the comments.