When it comes to taking out loans, most of them are pretty straightforward. An auto loan helps you get a car. A mortgage loan helps you get a home. A student loan helps you go to college. But, what about personal loans? Well, just like the name suggests, a personal loan is a loan you can take out to help you pay for something personal.
Taking out a loan to help you pay personal expenses doesn’t sound so bad but requires deep thought. There are a few things to consider before taking a personal loan. These types of loans come with a different set of requirements. This can make them harder to get, more expensive to have, and potentially unhelpful. Check out 5 things to consider before you apply for a personal loan.
#1 Personal loans often come with higher interest rates
Unlike mortgage and auto loans, personal loans function like a credit card. The available credit you are loaned is not tied to an asset. This makes it an unsecured debt. Unsecured debts have a much higher interest rate than secured debts. Since the lender can’t tie your credit to an asset, they charge higher interest rates to ensure they get their money back and some.
Before accepting or applying for any personal loan, it’s important to understand the interest rate you would be required to pay for using the loan. Does it make sense to take out a personal loan if the interest rate is significantly higher than your credit cards? If not and you have available credit on your cards, maybe you should stick with your credit cards.
#2 Repayment terms on personal loans are often shorter and more-accelerated
Another thing to consider before taking a personal loan is that the repayment terms are not as flexible as other types of debt. This is especially true for a loan that’s used to consolidate all of your debt. The lender will want to make sure they get their money back in a specific amount of time. That means a higher monthly payment because a shorter loan term.
#3 Personal loan amounts are often generous
One of the benefits of taking out a personal loan is that the loan amounts awarded are often pretty generous. For example, Wells Fargo personal loans range from $3,000 to $50,000. Now, just because a company offers a wide range like that doesn’t mean you will be approved for it. However, if your credit isn’t in bad shape and your income is relatively high, you can get away with that.
A word of caution though. Most people fall into this false sense of security that comes with available credit. When you are taking out a personal loan, make sure you only take the amount you need. If you get frivolous with your spending because you have a high credit line, you may put yourself in a worse position for the future.
#4 Personal loans can help when consolidating debt
Personal loans to consolidate all of your debt can come in handy. If you have a lot of different forms of credit, with different interest rates and due dates, having them all combined into one payment due on one date can make your life much easier. As mentioned earlier, keep in mind that it could mean a very large monthly payment. The good thing about that? At least you know an end date! Read 5 Things to Know About Consolidating Debt for more information.
#5 You can be sued for non-payment of the personal loan
If you think you can get away with not paying back your personal loan, think again. Because your personal loan isn’t tied to any one asset in particular, there is nothing for the lender to seize. That means, they can come after you in court to get their money. When you agree to taking a personal loan, your terms and disclosures will advise you that they can seek repayment in any way possible. Don’t take a personal loan if you don’t plan on paying it back.
Related: 5 Ways to Approach a Bank Loan
Just like anything, there are pros and cons to taking out a personal loan. It can help you get organized with your debt, but it can also cost you a lot in terms of interest. Any form of unsecured debt should be thought through in detail before accepting anything. Have you taken out a personal loan before? What experiences did you have with the process? Share your thoughts by leaving a comment below.