For some, the benefits of personal loans can provide options that are hard to ignore. From financing a major purchase to unexpected expenses or possibly to assist you with consolidating existing debt, a personal loan can be the right option in many scenarios.
What is a Personal Loan?
A personal loan is an 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. With some other types of loans like installment or payday alternative data might be used. The average credit score in Canada is about 670, and banks often expect considerably higher scores before they approve loan applications. This makes online lenders a viable option which often have lower rates than banks.
This type of loan can also come with a number of additional costs like origination fees and similar which would be provided within your agreement so you are completely aware of the full cost of borrowing. They are typically used for many reasons, with some of the more common ones being large purchases, covering emergency or unexpected expenses, along with a way of improving your credit score via debt consolidation. Using personal loans for debt consolidation is likely the most common use for this type of loan. It’s often used for credit card debt, but sometimes people might have high interest loans they need to take care of, or a combination of the two.
What are some Personal Loan Benefits?
If you’re looking for a benefit of obtaining a personal loan, you can take your pick since there is more than one. The following are some of the more obvious benefits to be aware of when it comes to why you might take a personal loan 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.
Repayment Terms – 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.
Lower APRs – 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.
Fewer Accounts to Manage – with a personal loan 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.
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.
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 may find lenders might charge you a higher interest rate for the opportunity to borrow. Being eligible for a good interest rate requires an excellent credit score.
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.
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.