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Considering A Personal Loan? What You Need To Know


If you’re confronted with a stack of credit card bills every month you may be tempted to wrap them all up into one new loan. If you’re a homeowner, you might be able to take out a home equity loan, but be wary about this: credit card debt is unsecured debt, but an equity loan is tied to your home. If you miss payments on your home equity loan, you could lose your home to foreclosure.

An alternative to borrowing against your home is a personal loan from a bank or credit union, sometimes called a “signature loan” because your own collateral is your signature. While that may sound like the perfect solution to your personal debt crisis, you should be aware that most financial institutions require you to have good credit before they will approve a personal loan. If you have significant credit card debt, your credit score may not be high enough to qualify for a personal loan. However, if you have made all your credit card payments on time, your credit score may not be as low as you think. A financial institution can check your score when you apply for a loan or you can pay a small fee at to get your credit score in addition to your free credit report.

personal-loan-plusAdvantages of a Personal Loan

Quick decision. Normally a bank or credit union will let you know immediately if you can qualify for a personal loan. If you do qualify, you can often have the funds deposited in your account within 24 hours or a check delivered within a few days.

Low documentation. Unlike a mortgage application, you typically need to provide only basic information for a personal loan such as your employment and income.

No collateral required. You don’t need to risk your home or a car or any other assets when applying for a personal loan.

Interest rate lower than credit card. While interest rates on a personal loan are nowhere near as low as mortgage rates, they are typically lower than your credit card interest rate. Make sure you compare these interest rates to be certain a personal loan will reduce the amount of interest you pay.

Confirmed payoff date. Personal loans are installment loans that must be paid within a specific period, so you’ll be forced to make the payments to eliminate your debt. Terms vary from one year to as long as 60 months.

Credit score improvement. Switching from multiple credit cards near their credit limits to a single installment loan can quickly improve your credit score. Installment loans, because they have an end date and you can’t increase your balance, are considered a less risky form of credit.

disadvantages-of-personal-loansDisadvantages of a Personal Loan

Difficult to qualify. The biggest disadvantage to a personal loan is that you simply may not be able to earn an approval for this type of financing. Lenders are wary of taking on a risky candidate, so if you’ve had late payments or otherwise demonstrated poor credit, you may not qualify.

Higher interest rates. While your interest rate on a personal loan should be lower than your credit card rate, personal loans have significantly higher interest rates than a mortgage loan, a home equity loan or a car loan because signature loans are unsecured. Your interest rate could be higher if you have less-than-perfect credit, too.

Payment shock. Credit card companies allow you to make a minimum payment on your debt and you can sometimes get away with making a partial payment. A personal loan requires you to maintain the same payment level throughout the loan repayment period. Make sure you know what the payment will be in comparison to what you have been paying on your credit card debt.

Danger of incurring new debt. If you lack financial discipline, you could be tempted to start using your credit cards again once you see all those zero balances. While taking on new debt can be dangerous under any circumstances, it’s particularly risky when you are making payments on a personal loan.

If you choose to apply for a personal loan, make sure you read all the terms and conditions of your loan. You may want to compare interest rates, payments and other terms with more than one lender, but try to get this information before each lender pulls your credit report, since too many inquiries for new credit could lower your score.

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