Personal loans are a popular choice for people who need money for miscellaneous day-to-day purposes. Many people take out personal loans to pay off credit card debt, fund unexpected medical expenses, or fund home maintenance and repairs. Rates are generally fairly low, and lately they have been nosediving.
Personal loan rates seem to be on a downward trend, and for borrowers with excellent credit scores, this means extremely cheap loans. For 3-year fixed personal loans, individuals can get rates as low as 10.36%. But can you take advantage of these rates?
The personal loan rates you are given will depend on your credit score. Lenders decide on an interest rate by taking your credit score into consideration among other factors. The worse your credit rate is, the higher your interest rate will be.
Personal loans are therefore cheap for some people but very expensive for others. If your credit score is below 600, you could pay as much as 29.32% on a 5-year loan. This is significantly higher than the rates on most credit cards.
Furthermore, the benefits you get from taking out a personal loan depend on the terms of the loan as well as your own ability to pay it off. Here are some of the issues to take into consideration.
Personal loans for debt consolidation
Debt consolidation is one of the popular reasons for which people take out personal loans. Debt consolidation refers to paying off multiple sources of debt with one loan and subsequently paying only that loan back. It can be useful if you have a number of credit cards and other sources of debt with high-interest rates.
Even if the difference between the interest rates you are already paying and the interest rates of the new loan is low, you can still benefit from debt consolidation. It makes paying the loans off easier and more convenient while setting up one fixed-term over which you will pay.
However, this can also lead to unexpected costs. If the term of your personal loan is longer than the terms of your current loans, you may end up paying more than you would have over the extra months or years. It is also important to mention that if you are in need of debt consolidation, you probably do not have a strong credit score, and you are unlikely to get a personal loan with a low-interest rate.
Medical bills in the United States are over four times higher than in any other developed nation. Even with good health insurance, you still need to pay high deductibles and copays. Health insurance companies are also reluctant to pay for ambulance rides which can cost thousands of dollars. Sudden medical expenses can therefore leave you scrambling for money.
A personal loan can help you pay for medical expenses when you have few other options. With a low-interest rate, you can ensure that you get the care you need without paying far more than you can afford.
There are alternatives, however. You can speak to your medical provider about paying your bill off in installments and they may provide a cost-effective solution.
Pressing needs at home
Whether or not you own a home, you may come up against problems you have to pay to take care of. This may be the repair or purchase of new appliances, fixing leaks in the roof, or getting your HVAC serviced. Waiting until you have cash available can make the problem significantly worse.
A personal loan can be a good option, especially if the expense is not too extreme. As long as your credit score is reasonable, it may be better than using your credit card to pay these expenses. However, because of the fixed terms of the loan, you will pay it off over a longer period of time which can make the loan more expensive than you realize.
Should you get a personal loan?
Personal loan rates are currently low and seem to be on a downward trend. This makes personal loans very attractive to people in need of a cash influx. While personal loans can be an excellent option, with low-interest rates and favorable terms, they can turn out to be quite expensive as well.
As with most other types of loans, whether or not you will benefit from the low rates depends largely on your credit score. If your credit score is particularly low, you may well be better off finding alternatives.