How To Use Personal Loans | Stash

How To Use Personal Loans

Published: Oct 14, 2024

• Updated: Nov 08, 2024

What is a personal loan anyway?

A personal loan is a sum of money borrowed from your bank or financial institution that you pay back in fixed installments. This loan accrues a set amount of interest, and can be obtained for both personal and professional purposes. Think: home renovation, covering expenses while starting a small business, or, as is becoming more and more common practice, consolidating debt.

Like a credit card, a personal loan is an unsecured loan, meaning it is a loan that is not issued based on collateral. Whereas secured loans, like mortgages and car loans, are based on collateral, like your home and car respectively, unsecured loans are not. As a result, they are often issued based on factors like credit score and income. The approved amount of your loan can vary depending on those same factors.

They are also more flexible in their repayment terms than some other types of loans. Like a mortgage, when you take out a personal loan, you have some choices when it comes to the amount of time you’ll take to repay the amount. You may choose an option that will take longer to pay off but offers a higher interest rate, or a shorter-term agreement with a lower interest rate.

What kind of personal loan is right for me?

There are many different types of personal loans to choose from, and the right one for you depends on what you’re looking to accomplish with the loan, and your current financial situation. Some examples of personal loans include:

Home Improvement Loans

This is a loan you might take out if you’re hoping to renovate or fix something in your home but don’t currently have the cash flow to do so. They can be approved in amounts ranging from as little as $1K to as high as $100,000, and are offered by many different financial institutions at interest rates that similarly range widely, anywhere from 7% to somewhere in the ballpark of 30%.

Debt Consolidation Loans

This is becoming an increasingly common use for personal loans. Debt consolidation loans can help with tackling mounting debt at a potentially better rate than the skyrocketing APR% typically associated with credit cards. The amount of savings depends on how much lower the rate you get approved for can be, but many institutions promise rates starting as low as 7%.

Medical Loans

The number of people in this country who go into debt for medical purposes is staggering. According to the Commonwealth Fund, 72 million people struggle with medical bills or are in medical debt. You can technically take out a personal loan to assist with medical expenses.

Business Loans

Some smaller business owners might also opt to take out a personal loan to cover expenses like inventory, payroll, or any other expense that comes up. This option offers a business owner more flexibility than putting everything on a credit card.

How do I apply for a personal loan?

It has never been easier to look into and apply for a personal loan. Online search engines like NerdWallet and Lending Tree make comparing different types of personal loans, along with their terms and interest rates, extremely simple.

There are two ways to apply, either in-person or online. According to Marketwatch, in both cases, the required documents are typically the same.

To apply for a loan in person: You might want to stop into your bank ahead of time to find out exactly what you’ll need to bring so you’re not stuck having to go back and forth.

To apply for a loan online: Applying for a loan online is a bit more streamlined and faster process. You simply browse through a search engine and apply.

What are some pros and cons of using personal loans?

Pros
- Fixed interest rates: many personal loans offer fixed interest rates, which means they cannot go up over time.
- Predictable repayment schedules: the payment will be due at the same time each month.
- No collateral required: your assets cannot be seized under the terms of your loan.
Cons
- Higher interest rates than secured loans: while not always necessarily the case, unsecured loans can have higher interest rates than those offered through mortgages or other secured loans.
- Fees: there is the interest, of course, but also origination fees when you first open the loan.
- Potential for debt accumulation: as with any loans, taking out a personal loan can make you vulnerable to getting into debt.

What are some alternatives to personal loans and how do they compare?

Personal loans v. credit cards

Personal loans and credit cards have a few things in common. Notably, they are both unsecured loans that are not based on collateral. Personal loans can offer a lower interest rate than credit cards.

Personal loans v. home equity loans

Home equity loans are loans that are taken against the equity of your home.

Personal loans v. payday loans

Payday loans are high-interest, short-term loans that are currently illegal in multiple states in the United States due to their predatory nature. Personal loans are a much more secure and stable option.

What are the interest rates & repayment terms?

Interest rates and repayment terms vary on a number of factors including your credit score, income, the loan amount and the specific lender. According to Bankrate, the average interest rate for a personal loan is 12.42 percent, on the low end compared to credit cards.

Overall, personal loans can be a cost-effective and stable way to finance an unexpected or expected expense that you don’t currently have the cash flow to cover.