When is the Best Time to Get a Personal Loan?
What exactly is a personal loan?
Maybe you have a wedding coming up, planning a vacation or want to pay down debt. If so, you probably turned to the typical funding sources such as credit cards, a home equity loan or maybe your own savings. However, there is another option that just may be a better alternative: personal loans. To better understand personal loans, and if they are right for you, keep reading.
A loan for personal reasons
A personal loan is exactly what it means – a loan for personal reason. Unlike other types of loans that are earmarked for a specific purpose, such as an auto loan, personal loans can be used for a variety of reasons. According to Credit Karma, the two most popular reasons people take out personal loans are to refinance credit card debt and to pay for unexpected expenses. Other reasons include making a major purchase, paying for home improvements and consolidating other types of debt. Personal loans are typically installment loans, which means that if you are approved, you receive a lump sum of the cash. You are then expected to repay the loan in fixed amounts on a monthly basis until the end of the loan term. Personal loans are unsecured loans and usually have a higher interest rate than a secured loan. However, personal loans often have lower rates than credit cards.
Advantages of getting a personal loan to pay off credit cards Since a top reason for personal loans is to consolidate debt, let’s look deeper into this.
Experian reported that the average American in 2017 had credit card debt of $8,195 on average for credit cards and retail cards combined. And, if you carry a credit card balance from month to month, your interest adds up. Compared with credit cards, a personal loan can offer advantages such as a single monthly payment for consolidated debt, a fixed interest rate and a fixed loan term.
If you consolidate your debts through a personal loan, you may only have to deal with one payment instead of multiple payments. A single payment means you could only have to remember one date and amount to pay each month instead of several dates and minimums across multiple credit cards. That could make your debt easier to manage.
Credit cards can either have fixed or variable rates, but variable-rate credit cards are now very common. When you have a variable-rate credit card, your interest rate usually changes with the prime rate, as published in the Wall Street Journal. That means that your monthly payment and amount of interest you pay on your balance can increase or decrease per your credit card agreement. Many personal loans have a fixed rate that doesn’t change based on an index. A fixed rate — and monthly payment — that’s lower than the various rates of your existing credit accounts could help you pay off your debt faster.
Fixed loan term
Personal loans typically have a set term for repaying the loan, whereas credit cards are a form of revolving credit, where you can determine how much you want to borrow and pay off each month as long as you make the minimum payment. And if you only make the minimum payment every month, it can take longer to pay off your credit card balance. Having a fixed repayment term with a set monthly payment could make it easier to budget toward paying off your debts.
Applying for a personal loan
A personal loan application process is pretty standard. Most lenders will check your credit reports and scores. Keep in mind that in many cases you’ll need good credit to qualify for a personal loan. If you don’t have a decent credit score, you may need to work with your credit union or financial institution for other options for financing your purchase or activity. You also may need to supply personal information, such as your income and employer that show you have some steady income to make the payments.
Consolidating your debt and having a plan of action
If you are take a consolidation loan out to get out of credit card debt, you should think about the factors that contributed to the original debt. You don’t want to go back to a cycle of spending and rack up more debt. For example, if you use a personal loan to pay off your credit cards but continue to use your cards to spend more, you’ll end up with a loan and a pile of credit card bills. Or if you use a personal loan to pay emergency expenses but fail to save for future emergencies, you could just have to get another loan the next time an emergency comes up. Personal loans are attractive and can be used to pay down your credit card debt. Plus one payment saves you time managing several credit card accounts. Start by speaking with a financial institution, like your local credit union, to see if a personal loan is the best option for you. They can guide you on the best way to pay down your debt, pay for that home improvement project or fund your honeymoon.
Credit: Credit Karma, NerdWallet
Not all members will qualify for a mortgage with Nymeo. You must qualify for membership with Nymeo to be considered for a loan. Credit decisions are based on several factors, such as creditworthiness of applicant(s), capacity to repay, and value of collateral.