It is that fastest growing debt category in the country, but anyone who thinks of student loans or credit cards is wrong.
Personal loan balances now top $ 300 billion for the second quarter of this year, an annual increase of a whopping 11%, according to Experian. And for good reason, because personal loans can help consolidate credit card debt or provide funding for major projects like home remodeling. For many of us the appeal is hard to ignore, but personal loans differ in a few important ways from other types of loans you may be using, such as: B. Credit Cards. It is important to understand the key differences before signing on the dashed line.
Interest rates vary widely
Compared to credit cards, personal loan interest rates can vary significantly more according to noises Research by ValuePenguin. In fact, some excellent credit borrowers may qualify for loans with interest rates as low as 5% or 6% with some lenders. On the flip side, borrowers with poor credit ratings may encounter higher interest rates than the average credit card, sometimes in excess of 30%.
This wide range of interest rates makes personal loans more affordable for those with better credit scores and may make most sense for borrowers with excellent credit who can pay off the loan on time. On the other hand, borrowers with poor or fair creditworthiness can face higher interest rates than they would otherwise qualify with a credit card.
Borrowers with less-than-outstanding credit scores should keep in mind that if your overall finances are not good, getting a personal loan for more money, if it means higher interest rates and monthly payments, will likely not help. Consolidating payments through a personal loan would not make sense in this scenario. Consider credit counseling options or try negotiating a lower interest rate with your credit card service provider.
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Shorter repayment schedule and commitment fees
Most personal loans are serviced on a three to five year repayment schedule, which means your minimum monthly payment is higher than that of a credit card. (Of course, paying the minimums on a card is never a good idea, but the option is there for times when other financial needs arise.)
In addition, personal loans often also have administration fees, which can increase your repayment burden and reduce the total amount of cash available to you on the loan. In order to qualify for some loans when you do not have a good credit score, you will likely need collateral for a secured loan. This means that if you cannot make the payments, you are putting your collateral at risk.
Advantages and advantages
In contrast to credit cards, personal loans offer fewer discounts or rewards such as cashback, points or airline miles. If you spend consistently on your credit cards, you’ll forego these rewards by consolidating the debt onto a personal loan. And chances are, if you qualify for a consolidated personal loan at rates lower than your credit card, your creditworthiness is likely to be good to begin with.
The bottom line: For borrowers with good to excellent credit ratings, personal loans can add to your credit mix and reduce the interest you pay on large home improvement projects or other major expenses. For those with an imperfect credit score, however, consider whether factors such as interest rates, property fees, and lack of perks, and whether a personal loan will result in significant savings.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.