Should I get a personal loan?

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Should I get a personal loan?

Whether you're looking to consolidate debt, finish a home improvement project or fund a medical emergency, you may need additional funds. While it's better to cover the need through personal savings if you have them, personal loans are also a possible solution.

What is a personal loan?

Personal loans can cover a wide variety of financial needs. Todd Nelson, business development manager for personal loan provider LightStream, says, "Many lenders offer loans for personal, household or family purposes, like credit card consolidation, auto purchases or home improvements."

What separates unsecured personal loans from other loans is that most other loans (like mortgages or auto loans) classify as secured loans that are protected by collateral (something like a car or a house, which your lender can take if you can't pay back the loan).

Some personal loans are secured - for example, Wells Fargo offers personal loans that are tied to your savings account. However, most personal loans are unsecured which means if you default, the lender is on the hook for the money they've loaned to you. As a result, lenders typically will charge higher interest rates for unsecured loans than secured loans, Nelson says.

Where can I get a personal loan?

Prior to The Great Recession, going to a brick-and-mortar bank was the only real option for those needing personal loans. That isn't the case today. Common providers of personal loans include:

  • Banks. Banks aren't the easiest place to get a personal loan, but their safety and convenience make them an ideal first stop if you have an established relationship with one.
  • Credit unions. Credit unions aren't all that different from banks, but unlike banks, they're member-driven and not-for-profit. Because of this, credit unions are often able to offer lower rates than banks, so you may want to include them in your search.
  • Peer to peer (P2P) lending. P2P lending is the newest option on the block. They offer online options for loans that may be helpful even if you don't qualify for them through more traditional routes. However, like banks and credit unions, P2P lending sites will assess your credit history and score, and may review other factors including your current job and your level of education before approving you for a loan.

Banks and credit unions look closely at your credit history and score to determine the amount they're willing to lend to you. Peer-to-peer websites, in most cases, allow you to borrow anywhere from $1,000 to $35,000.

Regardless of who you choose to go with, consider limiting the number of loan applications you submit, as too many can negatively impact your credit score.

This is because whenever you apply for a loan, the lender will most likely check your credit report in order to make their decision. This is known as a hard inquiry and it may lower your credit score by a few points. They may also remain on your report for two years.

There are other alternatives to personal loans, like payday and car title loans. However, experts generally recommend avoiding these options as they typically have exorbitant interest rates and fees. For example, according to the Consumer Financial Protection Bureau, a typical two-week payday loan may have fees that equate to an APR of almost 400 percent.

Getting a personal loan when your credit needs work

Getting a personal loan with credit that needs work is possible, though often more difficult - and more expensive. Banks and P2P lenders generally evaluate your credit history and current situation when making a lending decision, so if your credit score isn't great, it may result in a higher interest rate.

Also, if you have credit that needs work, consider getting a co-signer. Nelson says, "You may not be able to receive a personal loan unless you have someone with good credit co-sign with you, making them responsible for the debt as well."

Getting a co-signer shouldn't be taken lightly because if you default on the loan repayments, the co-signer is now responsible for repayment. That said, it may be worth considering if you're facing challenges securing a loan through other channels.

Bottom line

A personal loan can be a great way to fund large expenses or save money on higher interest debt. However, make sure to do your homework before applying for a loan to secure the best one for your needs.

About the author: John Schmoll, MBA, is a former stockbroker and veteran of the financial services industry. He left a career with a well-known brokerage house in 2012 to grow an advertising business with his wife, write about finance and start a personal finance site, Frugal Rules. His work has been featured in Forbes, Fortune, U.S. News & World Report, Yahoo!Finance, CNBC, Daily Finance and more. Follow John on Twitter.

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All Comments

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0 People Helped

I would like to combine some debt. I have two Credit Cards and a car I would like to consolidate. In total 12k would take care of it. I'm just not sure which route would be best. Keeping the two Credit Cards with Next to Max credit used ( 81%) and a car loan or pay it all off with a Personal Loan and have it on my profile instead.

1 Contribution
0 People Helped

I have a question. I am considering a debt consolidation loan of about 14K.

My question is:

Will it benefit my credit history MORE to get the loan sent straight to me and then pay my credit card debts off directly from me, or get the consolidation loan and have the lender to directly pay the credit card debts down that I am borrowing for?? I cannot seem to find an answer to this question! Thank you for any helpful info!

Credit Karma Team
Top Contributor
2949 Contributions
4607 People Helped

It might not make a difference, the source of the payment will not be included on your credit report. 

Reply by
cinco11

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0 People Helped

hello I just read your question, I tried getting a personal loan once to pay off debt and the only way the credit union would do it was if they paid my creditors directly.

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