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10 Possible Benefits of Obtaining Personal Loans

10 Possible Benefits of Obtaining Personal Loans
Sarah Li Cain
Sarah Li CainUpdated August 12, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Not all debt is bad. Think credit cards, where consumers use them for everyday purchases, or getting a mortgage to purchase your first home. As long as you’re responsible — you’re intentionally using loan proceeds and have a plan to pay it back — carrying debt might help you reach your financial goals. Personal loans are another form of debt that can be beneficial if used carefully. Whether you’re looking for secured or unsecured loans, there are plenty of advantages to personal loans.

What Is a Personal Loan?

Personal loans are a lump-sum of money a bank, credit union, or online lender lends to a borrower, who will repay the loan in fixed installments for a predetermined amount of time. These payments include interest and any applicable fees. Borrowers can choose from either secured or unsecured loans. The former requires the borrower to put up collateral to guarantee the loan, whereas the latter doesn’t. Personal loans are also known for their flexibility in that borrowers can use the funds for almost any purpose. 

10 Benefits of a Personal Loan

If you’re wondering what is a benefit of obtaining a personal loan, the answer is that there are many. Some personal loan pros include its flexibility, higher borrowing limit, and predictable repayment schedule. 

1. Higher Borrowing Limit Than Other Debt

A popular alternative to personal loans are credit cards, but you may not be able to borrow a large sum. You may be better off with a personal loan if you’re looking to borrow at least $10,000. For instance, SoFi personal loans allow you to borrow up to $100,000. 

2. Lower Interest Rates Than Credit Cards

Interest rates for personal loans are usually lower compared to what you’d find for credit cards. For those with good credit scores, personal loan rates start at around 5%. Even those with fair credit scores may not be charged rates in the double digits. Compare personal loan rates to credit cards, which often charge much higher rates. If you carry a balance on your cards, the interest adds up. 

3. Collateral Is Not Typically Required

Borrowers who take out unsecured personal loans don’t need to put up collateral to borrow money. While defaulting on your loan can have adverse consequences, you won’t lose any assets or property like you would with a secured loan. 

4. Easy To Track and Manage

Taking out a single personal loan is simpler than cobbling together a larger loan by using multiple credit cards. Multiple loans tend to come with different payment due dates, lender policies, and interest rates. It’s far easier to take out a lump sum and make one payment using one lender. 

5. Predictable Repayment Schedule

Since personal loans are installment loans, they come with fixed repayment terms. That means you’ll know for how long you’ll need to make payments. For fixed-rate personal loans, your rate will remain the same and you’ll know exactly how much you’ll pay in interest throughout the lifetime of your loan. 

6. Repayment Term Longer Compared to Other Loans

Personal loans offer a wide range of repayment terms, from a few months to a few years. You may be able to find unsecured personal loans offering longer terms, possibly up to seven years. Compare this to payday loans that have much shorter terms and exponentially higher interest rates.

7. Building Credit History

Any time you take out a loan, you’re building your credit history. Personal loan lenders report your payment activity to major credit bureaus — either Experian, Equifax, TransUnion, or all three. Making on-time payments consistently helps to build a strong credit history and boosts your credit score. However, missing a payment will also be reported, potentially impacting your score negatively. 

8. Ease in Applying

Filling out an application form for a personal loan is relatively simple compared to other types of loans like a mortgage, home equity loan, or a home equity line of credit. Plus, there are plenty of online personal loan lenders that use an application process that’s completely online. 

9. Fixed Interest Rates

Unless you decide to go with a variable rate loan, most personal loans have fixed interest rates. This is beneficial because you know exactly how much you’ll be changed in interest for the lifetime of your loan — no surprises there. 

10. Personal Loans Can Be Used For Many Purposes

While all of the above points are good reasons for personal loans, perhaps the main one is that you can use a personal loan for most purposes. Some common uses include major purchases and debt consolidation. 
  • Refinancing existing debt. Many borrowers take out debt consolidation loans to simplify their loan payments, ideally at a lower interest rate. The single loan is taken out to pay off existing debts and the borrower is left with paying back a single loan. Ideally, this personal loan will also have a lower monthly payment compared to the combined total of the debts you want to consolidate.
  • Making major one-off purchases. A personal loan can be an option to pay for large purchases such as a home renovation project. It tends to be a better option compared to other alternatives, especially if you have a high credit score (which can qualify you for lower rates) or you need to borrow more than your credit card limit.
  • Vehicle. Auto loans are a common type of secured personal loan, where your car is the collateral, and might be a better bet if you’re purchasing a car from a dealership — you could get a lower rate. 
However, if you’re purchasing a car directly from the previous owner, an unsecured personal loan may be a good option, since lenders may not fund a private-party transaction directly. You can take your loan proceeds to pay for the car in cash and make monthly payments to your lender. 
  • Home improvements. Funding large home improvement projects using a personal loan can be a good idea, especially if completing renovations helps you to increase the value of your home. Plus, it could be an alternative if you don’t have enough equity in your home to take out a home equity loan or home equity line of credit.  
  • Vacation. Using a personal loan to pay for a vacation might be helpful if you want to make sure you don't mindlessly spend (like you might using credit cards). Getting a lump sum payment can help you prepay for certain expenses such as hotels, attractions, meals, and souvenirs. 
  • To buy land. Many lenders offer personal loans for land purchases. There may be requirements such as restrictions on the planned use of the land that you finance. Some lenders even offer land loans to help you with land improvements, preparation, and home construction. 
  • Wedding. Weddings can cost a pretty penny, and this major life event can take months of preparation. For instance, you may need to make multiple deposits months or a year in advance to secure your catering and venue. If you’re considering taking out a personal loan, try to come up with a realistic budget and get a loan amount for that size. 
  • Major emergency expense. Life happens. Even with the best of intentions (and a rock-solid budget), you could face a huge financial obstacle, like an unexpected medical bill. In this case, you might consider taking out a personal loan and stretching out your payments so you can afford it much easier than you would if you had to pay a lump sum. 
  • Financing some types of training. Though you can’t usually use a personal loan to fund a college education (there are student loans for that), you can use personal loan funds for career development purposes. For instance, you may be able to borrow money to get a commercial driving license (CDL), certificate programs, and professional development courses.

Personal Loan Alternatives

If you can’t qualify for a personal loan or don’t need to borrow a large sum of money, there are some alternatives to consider. 

Credit Cards

For those who aren’t sure how much they’ll end up borrowing or want more flexibility, a credit card may be a good choice. It offers flexibility in that you can use your credit card at any time, instead of having to fill out an application form each time you want to borrow money. Plus, you don’t have to pay any interest if you’re able to pay off the statement balance each month.However, you could end up carrying debt if you’re not careful about how much you spend. Interest rates are generally high, so make sure you do some calculations to see which is the less expensive choice, a personal loan or a credit card. 

Overdraft

Most banks have an overdraft option that allows account holders to withdraw more than the amount currently in their bank account. This might be a feasible option if you need extra cash for a day or two until your next paycheck comes. Make sure to read the fine print about what you may be charged. It could be possible to pay multiple overdraft charges, especially if you overdraw your account more than once a day.

Borrowing From Friends and Family

Asking to borrow money from friends or family may be a good idea, especially if you have limited or bad credit. Depending on the loan arrangement with the other person, you might not have to pay them back any interest or lower rates than you could get through a bank — if so, it could cost you much less than a loan you’d get elsewhere.Borrowing from family and friends can potentially be harmful to those relationships if you make payments late or can’t pay back the loan at all. Clearly outlining the expectations of the loan in a formal written document is a smart idea. 

Apply for a Personal Loan Now

Whatever your reasons for taking out a personal loan, shopping around to find the best rates and terms is a good idea. You can certainly go to each lender and get prequalified, but doing so will take hours and leave you feeling overwhelmed.Instead, Lantern by SoFi helps you compare multiple personal loans at once. Start by providing details such as your estimated credit score range and location, and Lantern will populate a list of lenders for you to check out. You can even get multiple quotes within minutes. 

The Takeaway

Taking out a personal loan shouldn’t be a decision to be taken lightly. Before you fill out an application, check to see whether there are any feasible alternatives, such as waiting to save up for that large purchase. For those who want to take out a loan, shopping around and reading the fine print before signing the dotted line ensures you know exactly what you’re getting into.
Photo credit: iStock/sorrapong
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SoFi Loan Products SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Business Oversight under the California Financing Law, license # 6054612; NMLS # 1121636. For additional product-specific legal and licensing information, see SoFi.com/legal.SOLC1021244

About the Author

Sarah Li Cain

Sarah Li Cain

Sarah Li Cain is a finance writer and podcast producer focusing on topics such as credit, insurance, investing, and real estate. Her work has appeared in major publications such as CNBC Select, Forbes, Redbook, and Business Insider.
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