In some cases, a personal loan may be the most cost-effective way to borrow.
There may come a point in your life when you need to borrow money. You may have raised some medical bills; You lost your job or your car decided out of business, and the cost of repairing it was prohibitive.
When it comes to borrowing money, you have options. Many people may rush to get access to a credit card. But a personal loan can be a more cost-effective way to borrow. Keep reading to learn more about personal loans and when you should get them.
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What is a personal loan?
A personal loan allows you to borrow money for any reason. Maybe:
Personal loans are unsecured, which means they are not tied to a specific asset, unlike mortgages and auto loans. Therefore, to be eligible for a personal loan, you will generally need an appropriate credit score. There are fair credit personal loans, but those usually come with higher interest rates.
For more information, check out our guide to how personal loans work.
Will you save money by borrowing with a personal loan?
A personal loan can be the least expensive way to borrow from an interest rate perspective. But to find out if that’s the case, you’ll need to ask yourself these questions:
1. How much am I looking to borrow?
Personal loans generally come with a minimum borrowing amount. In some cases, the lowest amount you can borrow may be as low as $1,000 or $2,000, but in others, it can be higher – like $5,000. If you only need to borrow a few hundred dollars, a personal loan may not be a good money-saving solution as it may cause you to have a higher loan balance than you actually need.
2. What interest rate will I be eligible for?
As mentioned earlier, the higher your credit score, the more likely you are to qualify for a good interest rate on a personal loan. To make sure you get the best rate, shop for a loan and see what offers you get.
3. Can I qualify for a 0% APR credit card instead?
Personal loans usually charge less interest than credit cards, but there is an exception. If you are able to get a 0% APR credit card with a long introductory period, it may end up becoming the cheapest borrowing option.
Just make sure you can pay off your balance by the time the introductory period ends. If you don’t, you’ll immediately hit the bargain at the credit card interest rate which can be very high. But if you qualify for one of these cards and think you’ll be able to pay off your loan fairly quickly, a personal loan may not be your best option.
A personal loan can save you cash the next time you need to borrow – but that’s not always the case. Do these questions before applying for one to make sure you’re making the right move.
Ascent’s Best Personal Loans for 2021
The Ascent team has scanned the market to bring you a shortlist of the best personal loan providers. Whether you’re looking to pay off debt faster by lowering your interest rate or need some extra cash to tackle a large purchase, these best-in-class choices can help you reach your financial goals. Click here for the full summary of The Ascent’s top picks.