What Are the Benefits of a Personal Loan?

If you’re in a tight spot financially, or need extra money to make a purchase, personal loans may be a great way to help you. Personal loans came into existence because people often need to make purchases before they have enough money to do so. Like the cartoon character Wimpy says in the famous Popeye cartoon, “I’ll gladly pay you Tuesday for a hamburger today.”  

However, many people are not clear on what the benefits of a personal loan are, or when you should consider getting a personal loan over other financial management options.  

So, to clear things up and help you make the financial decisions that work best for you, we’re sharing what you need to know about personal loans, and how to help obtain one.  

What Is a Personal Loan? 

Personal loans are unsecured loans with relatively fast funding times. They usually have a fixed interest rate and payment schedule and can be used for a wide variety of purposes.  

What this means is that you don’t need collateral like your car or a house to secure the personal loan, you receive a lump sum (read: specific amount of cash up front) as soon as the loan is funded, and you know exactly how much your payment will be each month until the loan is paid off.  

Interested in a personal loan? Click here to see your loan offers in minutes. 

Why Do You Need a Personal Loan? 

People use personal loans for many reasons, such as debt consolidation, home improvement projects, medical expenses, or even vacations.  

Here are some of the most common reasons you might want to consider a personal loan: 

• Debt consolidation 
• Credit card refinance 
• Home improvement 
• Student loan refinance 
• Large purchase 
• Medical or dental debt 
• Taxes 
• Vacations 
• Wedding 

What is the Difference Between a Personal Loan and a Credit Card?

While they can be used for similar reasons, personal loans and credit cards work very differently.  

Credit Cards 

Credit cards are a line of credit (i.e., a maximum amount of funds you can access) with interest charged on any money you don’t pay off each month.  

Credit card interest rates often vary and are relatively high compared to most loan interest rates. This means your monthly payment can vary, and it can be challenging to determine how long it will take to pay a large balance off.  

Personal Loans 

Personal loans, on the other hand, are an installment loan – meaning you receive a lump sum of money up front and have a fixed repayment schedule over a set period of time.  

In most cases, personal loans have a fixed interest rate that is often lower than most credit card interest rates. There is also usually no pre-payment penalty, meaning you can pay your loan off sooner and save money on interest.  

Get started now: Find the best loan offers for you here. 

What Are the Benefits of a Personal Loan?  

Personal loans have many benefits, especially in comparison to alternative borrowing options like credit cards or secured loans. Here are some of the key benefits you should consider.  

Simple Interest 

A great benefit to personal loans over credit cards is that most personal loans accrue simple interest, not compound interest. This means that you only pay interest on the principal amount of the loan, and not the interest charges.  

For comparison, most credit cards accrue compound interest. This means that any interest charges you do not pay off each month also accrue more interest, which means your debt can snowball and cost you much more than you might expect over time.  

Lower Interest Rates 

Many people qualify for relatively low interest rates on personal loans than they can find through credit cards. According to Bankrate, the average personal loan interest rate is currently around 12.29%, while the average credit card interest rate is around 20.35%.  

No Collateral Required 

Unlike secured loans, you don’t need to provide collateral for most personal loans. While unsecured loans often have a higher interest rate than secured loans, you don’t need to put your car, home, or other valuables at risk in the event that you default on your personal loan.  

Quick, Lump Sum Funding 

Personal loans are often a great option if you need funds quickly. Some banks will fund your personal loan as soon as one business day. This is faster than the closing time of most secured loan options, as there is no need to verify collateral.  

You will also receive a lump sum up front. Funds are typically delivered via direct deposit to your bank account or as a check.   

How Do Personal Loans Impact Your Credit Score? 

Personal loans affect your credit score in several ways, and how you manage the loan will play the biggest part in determining if the impact is positive or negative.  

Hard Credit Inquiry 

The loan application will typically require a credit check, also referred to as a hard credit inquiry. This can temporarily negatively impact your credit score.  

Amount Owed 

Once you close on the loan, your total debt owed will usually increase. This can also have a negative impact on your credit score, depending on how much debt you already owe.  

Payment History 

The largest portion of your credit score is determined by your payment history. Making on-time payments towards your personal loan can positively impact your credit score, while missed or late payments can have a negative impact.  

Credit Mix 

Additionally, adding a personal loan to your credit profile can diversify your credit mix. Credit mix is another important factor in your credit score as it shows potential lenders how you manage different types of debt.  

Credit Utilization Ratio 

If you intend to use your personal loan to consolidate credit card debt, this can improve your credit utilization ratio. This is a very important factor in your credit score, and keeping your credit utilization ratio low can positively impact your credit score.  

How to Get a Personal Loan 

Ready to find out if a personal loan is right for you? Click here to see what options are available to help meet your needs. Simply answer a few quick questions about your personal loan needs, and we will match you with the best personal loan offers based on your answers.  

Click here to get started today. 

IDIQ® is NOT a bank, lender, home improvement, or insurance company.  Offers made on this page are offers for services by independent parties and are not companies of IDIQ. Some offers may come from IDIQ advertising partners.