Whether it's to get out of debt for good or purchase a home, achieving specific financial goals is a dream for many – but one that can too often feel impossible and unrealistic. With 34% of people in the United States struggling to make ends meet and the cost of living steadily increasing, people need financial aid now more than ever. One way to reach certain goals is through personal loans.
Personal loans are essential for many people looking to enhance their financial security and well-being for greater independence. These loans are invaluable when used correctly; however, issues can quickly arise if you don't understand how personal loans work.
So what should you know about personal loans, how can they contribute to your financial planning, and are they worth it? Read more to find all the answers you're looking for.
What Are Personal Loans?
Personal loans help you cover nearly every expense to reach your financial goals and remain financially stable. They are used for many reasons, such as emergencies, debt consolidation, home improvements, vacations, and other personal expenses. However, as with any loan, there are terms that the lender requires borrowers to adhere to.
How much you can borrow with a personal loan depends on many factors, such as your income, unsecured debt, and unique underwriting criteria, depending on the lender. Your loan's interest rate depends on your credit rating.
How Do Personal Loans Work?
Personal loans are lump sums borrowed from your credit union, bank, or online lender and deposited into your account. These loans are typically paid back in fixed monthly installments at a fixed interest rate. They come in varying amounts, with lenders like PFCU offering personal loans up to $25,000.
Payment timeframes vary depending on the lender but usually don't exceed ten years for larger sums. The loan's annual percentage rate (APR) depends on the lender. PFCU's personal loans have an APR as low as 9.99%, depending on your credit. Most personal loans are unsecured and not backed by collateral, though some lenders provide secured personal loans.
What Are the Types of Personal Loans?
There are numerous types of personal loans that can benefit your financial planning in different ways. Here are a few common personal loans you might consider to meet your financial goals.
Unsecured Personal Loans
Unsecured personal loans do not need collateral to receive the loan, making them inherently riskier for lenders but benefiting borrowers who aren't prepared to offer collateral or have property taken if they fail to repay the loan. However, because there is no collateral, these loans tend to have stricter qualification requirements and a higher APR.
Your credit must be in good standing to qualify for an unsecured personal loan. Unsecured loans usually offer a fixed payment amount and interest rate for a specific period. There are still consequences to failing to pay an unsecured loan and lenders can take legal action when necessary to receive their payment. Failure to repay this loan will also negatively impact your credit score, potentially risking your financial future.
Secured Personal Loans
Unlike an unsecured option, a secured personal loan requires collateral to qualify. Because collateral is involved with this loan, it's usually easier to qualify for, making these loans a viable option for people with credit in poor standing or who have a smaller budget to make repayments. Rates tend to be lower for secured personal loans than unsecured loans because there is collateral and less risk on the lender's behalf than with an unsecured loan. Collateral might include your vehicle, property, or bank account.
Debt Consolidation Loans
A debt consolidation personal loan is intended to cover various outstanding debts, consolidating your debt into a large loan with fixed monthly payments. You might choose this type of loan if you're struggling with the annual rate you pay on your outstanding debt. Instead of paying off handfuls of loans monthly with individual APRs and stringent terms, you only need to provide a single monthly payment for this type of loan. However, these loans might require a strong or steady credit score, which isn't always feasible.
Personal Line of Credit
Personal lines of credit (PLOCs) are a type of revolving credit resembling a credit card. Though other personal loans provide borrowers with a lump sum of cash to cover expenses, this type provides access to a credit line that can be borrowed from whenever necessary.
Borrowers with a PLOC only pay interest on the amount borrowed, and funds can be borrowed up to a specific limit. While there are advantages to these terms, borrowers should remember that most PLOCs have variable interest rates that can make it difficult to predict repayment amounts.
How Can Personal Loans Benefit My Financial Planning?
Personal loans are undoubtedly valuable for many struggling with outstanding expenses or debts. But what are the exact ways that a personal loan will benefit your financial planning and future? Here are some of the core advantages these loans provide.
Personal Loans Help With Emergencies
When emergencies happen, you might need access to instant funding that you don't have available. Personal loans are a perfect source of fast funding to cover unexpected expenses and emergencies – for instance, you might use a personal loan to cover sudden health problems, a broken down car, or damages caused by an unanticipated disaster that requires urgent attention.
Personal Loans Can Help Build Your Credit Score
Maintaining a steady credit score is essential for numerous reasons, and building your credit health can help you significantly in the future. Personal loans require you to make regular monthly payments to pay off your loan balance, and if you can make consistent, timely payments, your credit score will increase.
Remember that building your credit score with a personal loan requires repayment responsibility – if you fail to make payments or default, your credit score can take a sudden blow that can be hard to recover from. Personal loans also place a hard inquiry on your credit report, and too many of these inquiries can damage your credit score. However, if you approach your loan with knowledge and responsibility, you can benefit long-term.
Personal Loans Provide Competitive Rates
Personal loans provide more competitive rates compared to other financial products. For instance, a personal loan's interest rate is typically far lower than the average credit card interest rate, allowing you to save more and use your funds more efficiently.
If you have a solid credit history and are financially sound, you are more likely to get competitive rates as a qualified applicant. While unsecured personal loans can have hefty rates, they're still typically lower than a credit card – and other types of personal loans lower that number even more.
Personal Loans Help Consolidate Your Debt
Many people feel like they're constantly drowning in debt; without a personal loan, this burden increases. With the national debt in the United States exceeding 31 trillion dollars in 2023, people are increasingly seeking a solution to consolidate their outstanding expenses.
Personal loans are designed to help consolidate your debt, with debt consolidation loans allowing you to pay off your loans and balances in a single loan rather than from several sources. It's a practical way to make debt payments easier and less stressful for the average citizen.
Personal Loans Fund Your Home Improvements
Whether you need home improvements to address unexpected disasters or make minor adjustments to your property, a personal loan can help you start the process. Many people take out personal loans to fund home improvement projects they don't have the funds for. Rather than stressing about the state of your home and how expensive it will be to make the repairs you need, you can turn to a personal loan from providers like PFCU.
Personal Loans Are Flexible
One of the biggest advantages of personal loans, especially compared to other loan types, is their flexibility. These loans can be used for practically any reason, whether you're looking to cover wedding costs, need funding fast, or want to get around to your repair projects.
Flexibility is particularly unique to personal loans because many other loan types must be used for specific purposes. Personal loans become more practical and reliable than your other options by giving you the space to fund what you need.
Navigate Financial Planning with PFCU
Personal loans are essential for many people, but they're only one component of your financial planning. You can turn to the experts at Philadelphia Federal Credit Union to access all the financial services you need.
PFCU is dedicated to helping individuals become financially responsible, letting you take charge of your financial future while protecting yourself from potential risks. Whether you're seeking personal loans, bank accounts, or insurance, PFCU has you covered. Schedule an appointment with PFCU today to embark on your financial journey.