A personal loan can be a quick and easy way to get a little bit of financial relief. Personal loans can be unsecured or secured, typically for a few or several thousand dollars, ranging up to $100,000 or more with some companies. With interest rates that are often lower than credit cards, personal loans can help you consolidate debt and get a little more breathing room at the end of the month.
In this interview, we speak to financial expert LaToya Irby, a credit and financial affairs specialist who has written for dozens of personal finance outlets and whose expertise has seen her quoted by publications ranging from USA Today to the Chicago Tribune.
Is taking out a personal loan a good idea? What’s the maximum a borrower should take out?
With the right loan terms, a personal loan can be a good idea to consolidate debt, make home improvements, or pay for uncovered medical expenses. You should only borrow as much as you can afford to repay. You can use a loan calculator to figure out the maximum amount you can afford based on your budget.
Is it better to take a short term loan with higher rates, or a long term loan with lower monthly payments?
It depends on the total interest paid for each loan option and whether the monthly payments are affordable for your budget. Ultimately, you want to pay the least amount of interest over the course of the loan, but it's important to choose a repayment plan that you can afford.
Is a personal loan better than using a credit card and if so, why?
There are pros and cons to both, and it really comes down to the loan purpose and whether you want to pay off the debt quickly or have the ability to borrow repeatedly over a period of time. Personal loans are better for long-term financing for a one-time financial need. You have a fixed interest rate, a fixed monthly payment, and a fixed repayment period but once you've repaid the loan you have to reapply for additional financing.
With a credit card, you can borrow money repeatedly as long as you stick to the repayment terms and you have available credit. Your interest rate can change. Your monthly payment can change based on your balance and your repayment period is based on your monthly payment. You have more flexibility with repaying a credit card balance, but that could lead to long-term debt if you're not careful.
When should you avoid taking out a personal loan?
You should avoid taking out a loan if you're having financial trouble and you can't afford to make your current payments. You should also avoid taking out a personal loan if you're getting ready to apply for a car loan or mortgage. Adding new debts could make it harder to get approved for major loans.
How often should you make repayments on a personal loan and is it worth trying to pay off your loan early?
You should definitely make your monthly payments on time. Paying extra can allow you to pay off your loan early and save on interest. Make sure there's no penalty for early payment. If there is, weigh the penalty against the interest savings. If you're saving a significant amount of interest, paying the penalty may be worth it.
What are the risks involved with payday loans?
The biggest risk involved with payday loans is getting stuck in a cycle of repeating payday loans. Most payday loan borrowers don't have the budget to handle paying such a large lump sum at once, so they borrow repeatedly—either the same loan or take out new ones. If a borrower doesn't have enough money in their checking account to cover the loan payment, it can lead to overdraft charges and a negative bank balance on top of owing the payday loan.
How does someone with bad credit get a personal loan, and is it a bad idea for people with bad credit to take one out? (Also, how can someone with bad credit bring it up?)
It's tougher to get approved for a personal loan when you have bad credit. If your credit makes it hard to qualify for a personal loan, you can offer collateral, look for a cosigner, or seek out a peer-to-peer lending option. Be prepared for higher interest rates that can lead to a higher monthly payment. You can raise your credit score and make it easier to qualify for a personal loan by catching up on past due bills, reducing debt, and making all your monthly payments on time.
Your Financial Decision
Just because the loan is personal, doesn’t mean you have to go it alone. A little advice from a financial consultant and some online research into the best personal loan providers can help you get a better idea of what taking out a personal loan entails. Keep in mind that you need to put your own finances and needs front and center—how much cashflow you need, how much you can spend each month in payments, what types of rates you can get with your credit rating, and so on. Once you’ve taken the time to hammer out the specifics, you can start comparing the best loan options, and get that much closer to securing the sort of financial assistance that can get you where you want to be.
About the Expert
LaToya Irby is an experienced personal finance writer who specializes in helping people take control of their financial situation. Her writing has been featured in dozens of publications, including USA Today, TheBalance and The Chicago Tribune.