What is a Benefit of Obtaining a Personal Loan
The benefits of a personal loan can provide options for some that are hard to ignore. From financing a major purchase or taking a trip to covering unexpected expenses and more, it can be the right option in many scenarios when you don’t have the funds.
What is a Personal Loan?
An unsecured personal loan is a borrowing option that does not require collateral for you to borrow, once you agree to the terms of interest for the cost of the loan along with a repayment schedule.
The interest rate of a personal loan is typically determined by your credit score. A higher credit score of 760+ is considered good, and more likely to be eligible for better rates and terms. Where a credit score around 640 might be considered fair and have higher interest rates. The banks have been raising the bar for eligibility and what it takes to qualify, leaving many Canadians to turn to private lenders and alternative sources.
For those that might not qualify for a personal loan, there are other types of loans like installment or payday where alternative data might be used and your credit score is of less importance. The average credit score in Canada is about 660, and banks often expect considerably higher scores before they approve loan applications. This makes online lenders an option, which often have lower rates than banks.
Some loans can also come with a number of additional costs like origination fees and similar. Such details would be provided within your agreement, so you are completely aware of the full cost of borrowing. Loans are typically used for many reasons, with some of the more common ones being large purchases, covering emergencies or unexpected expenses. Another option for borrowing a personal loan is it’s a way of improving your credit score via debt consolidation.
RELATED : How to Prequalify for a Personal Loan
What are some Personal Loan Benefits?
If you’re looking for a benefit of obtaining a personal loan, there are several to choose from. The following are a few to be aware of when considering personal loans in Canada.
Predictable Repayment Schedule
When taking a personal loan you agree to a predetermined amount that follows a repayment schedule. The interest rate and monthly amount are part of your agreement that you sign prior to submitting your request and it allows you to decide how manageable it will be with your own personal financial situation.
Sometimes you have the option of longer repayment terms, which would cost you more in interest, but might be more accommodating with your own personal finances. In other words, a longer repayment schedule with lower monthly payments might be more appealing to work with your own finances, even if a small loan might cost a little more.
If you carry credit card debt, you might find the option of obtaining a personal loan to be more beneficial as a way to pay off those cards. It’s possible that a personal loan could have an interest rate that is lower than what the credit cards are charging, and that can help you to save money in the long run if you use it in a prudent financial manner. Even a few percent points can add up to hundreds, possibly thousands of dollars.
Potentially Better than a Credit Card
With an unsecured personal loan the options might be more appealing when compared to using a credit card. You might find the interest rate is lower, or you might find that you can be eligible for a larger sum to borrow than a credit card.
Fewer Accounts to Manage
If a personal loan is used to consolidate debt, not only can it help you save money, but it can become more manageable dealing with a single payment. This might help with ensuring payments are made on time and also help with managing your credit score and avoiding late or missed payments.
Getting a personal loan online is a fairly quick process for both applying as well as decisions, providing fast funds that can even be in your account the same day if an e transfer loan request was used.
Managing Cash Flow
Perhaps you do have the funds in an account but prefer not to drain your savings. Taking a personal loan can help manage your cash flow with monthly payments, which might be a better option than depleting your savings.
RELATED: 5 Things to Know When Looking for Personal Loans
While this isn’t every possibility, above provides a few good reasons to consider for personal loan benefits and advantages.
What are some Personal Loan Disadvantages?
With a personal loan you become committed to making fixed monthly installment payments, which can become an issue if your situation changes such as if you were to lose your job or experience sudden expenses. While credit cards might allow you the flexibility of making minimum monthly payments, the interest rate is likely higher and not usually your best option.
If you have a poor payment history or bad credit score, you will likely find lenders to charge you a higher interest rate for the opportunity to borrow. Being eligible for a preferable interest rate often requires a good to excellent credit score, without too much debt.
Borrowing more than you can afford can put you at a disadvantage, which isn’t the same, but still worth mentioning. Lenders make decisions based on your credit history, but also your debt. Sometimes they are unable to see all financial obligations. Usually, you’re the only one that has an idea of the entire picture, and when you borrow more than you can afford, it has it’s challenges. Knowing of your costs like your incoming (salary) along with outgoing (expenses) provides you with an idea of what you can afford. If this is unfamiliar, it is strongly recommended to start learning basics on managing money and having a budget. Those that do tend to be more on top of their finances and are less likely to need a loan for unexpected expenses or other reasons.
RELATED: Getting Approved for a Personal Loan with Really Bad Credit
When is the right time to get a Personal Loan?
While some might desire a personal loan for a large purchase or to fund travel plans, there are a couple ways you might look at whether it’s the right time to borrow.
First, do you consider your situation to be mostly financially stable? Sometimes there are circumstances beyond your control that can have an impact.
Second, are you choosing a personal loan for more of a necessity or luxury? Such as home repairs versus upgrades. Using such a loan mainly for essentials or take care of debt is often the right choice.
Having the option available is another consideration. Should unforeseen difficult times or expenses become a concern, having the option available is important. If you raise your debt to income ratio too much it can impact your credit score and make the possibility of getting a personal loan when you really need it unavailable during times you truly could use it. If you don’t have the funds in your savings account and have a need or expense you want to take care of, it could be the right time for a personal loan.
Another consideration, if time is on your side, could be whether you should take a loan now or try to improve your credit score. Find out where your score is if you don’t know already. Consider there can be thresholds or cut off areas for your eligibility. For example, if your score was 595 it is most likely worth your while to improve it to at least 600 if not 620 to possibly get a better rate. While every lender is different, some of those targets to shoot for and get your score above can include 670, 740 and 800 to get better rates. If your loan needs are not urgent and you know your score is on the edge of potentially unlocking a better interest rate that may save your hundreds or even thousands if you qualified for a lower interest rate, isn’t that something you’d look at and consider?
RELATED: Best Personal Loans for Excellent Credit
Making the right choice a Personal Loan
It’s important to borrow responsibly since it can keep you out of hot water in future. Just by keeping a few simple borrowing best practices in mind can make all the difference.
– Only borrow what you need; it’s easy to start thinking of it as a shopping list but borrowing should be limited to the original purpose
– Only borrow what you can afford; will the monthly loan payments fit your budget?
And finally, always read the terms of the loan agreement carefully. It isn’t fun, but it is extremely important. This is where some lenders might introduce any unmentioned fees or similar, which must be in the agreement by law. It will also contain your interest rate, APR, term of the loan, monthly payments and more. You want to review the agreement carefully because once you have signed you have contractually agreed to what it says and would be liable for delivering on the terms that you agreed to.