While they may be cheaper than using credit cards, if used recklessly they can lead to more debt problems.
There is no telling when an emergency will come barreling in like a ton of bricks. To an unprepared budget it could leave a dent in your wallet, not to mention a ton of stress. For many consumers, the struggle is real and disconcerting: “Nearly two-thirds of Americans including the affluent don’t have $1,000 for an emergency room bill or even $500 for an unexpected car repair.”
With that in mind, recent findings by Bankrate that, “24 million Americans are likely to take out a personal loan this year,” isn’t too surprising.
“I think the actual number will be even higher,” Todd Albery, personal loans expert and CEO of Quizzle.com, says. “A lot of people don’t plan for a personal loan until their roof leaks or their car breaks down. Since three in 10 Americans have no emergency savings whatsoever, they’re just one unplanned expense away from needing cash in a hurry.”
When people find themselves in a financial bind they tend to borrow to cover it. Financial experts often advise that personal loans can be much cheaper than using credit cards because of the lower interest rates they carry. Seventy-five percent of Americans have at least one credit card according to the Federal Reserve and so the likelihood that they may use them in case of an emergency is highly likely. While both forms of credit can be blessings when faced with a dilemma, both can lead to even more challenges with debt if not handled responsibly.
So, what are personal loans?
These are loans that you can take out to do whatever you want – from car repairs, to covering medical bills and vacations to paying down debt or even investing. We’re specifically talking about unsecured loans that do not require collateral in order to borrow against – so this doesn’t include secured loans, like home equity loans. These loans can be easy to qualify for, but in order to qualify and lock in the best interest rates, your credit score must be somewhat pristine. But, as with everything else there are upsides and downsides to taking out personal loans.
Here are some pros and cons of unsecured personal loans:
- You do not need assets to borrow against
- Because little paperwork and documentation is required when taking out personal loans, it often takes only a few days to get approved
- Qualifying for a loan is easy, especially if your credit score is good or better
- Interest rates are usually lower than what you get with credit cards. However, if your credit rating isn’t stellar, the interest you pay might be higher or you may not be able to get approved at all.
- The monthly payments are fixed, unlike with credit cards where monthly payments vary.
- If you pay off your loan sooner than the term you agreed upon, you may face a loan prepayment penalty fee unless your loan agreement allows for early repayment.
- You do not have to provide a specific reason for which the money will be used.
Personal Loans or Plastic?
Especially when interest is factored in, personal loans seem to offer a better bank for your bucks than credit cards. Bankrate says, the average interest for a personal loan is 11.3 percent but people with good credit can get a personal loan for as low as 5.5 percent. The average credit card interest rate is 15.7 percent.
“The availability of personal loans can be good for someone scrambling to cover an emergency for instance. But, the best course is to make a habit of saving for rainy days. While they may help you get out of a bind fast, they may also put you in a bind especially if you do not qualify for the best interest rates,” Consolidated Credit’s President Gary Herman says. “Your most profitable bet to cover any project or expense is to save up for them. By opening a savings account, you earn interest instead of taking out loans and credit where you pay interest.”
With Americans planning to take on a record number of these loans, here are some good reasons to consider taking out a personal loan:
- To create an emergency fund – This way when emergencies comes knocking you will have access to that cash instead of resorting to high interest credit cards.
- To get out of debt – It may seem like an oxymoron but if you’re carrying high interest rate credit card debt, taking out a personal loan with lower rates to pay it off sooner makes sense and can save you money.
- For home improvements – Just make sure that these renovations or beautification projects add value to your home without tapping into your equity.
- To save for retirement – Open a Roth IRA. But, keep in mind that if you decide to tap into it before it matures, you will be penalized for early withdrawal.
- To improve your credit – One of the major factors that go into calculating your credit score is the types of debt that you carry. The higher the mixture the better for your credit rating. So, taking out a small loan and paying it on time can help give your score a boost.
If high interest credit card debt is preventing you from starting a rainy day fund, endeavor to get out of debt as soon as possible. Negotiate lower interest rates with your creditors. If unsuccessful, give us a call at 1-888-294-3130 and we will negotiate on your behalf. Lower interest rates would mean that you could get out of debt sooner, so you can plan for the rest of your life including saving for unforeseen circumstances.