Whether you’re scuffling financially amid the pandemic and want a more affordable means of making ends meet rather than rack up your credit card bill, or you’re just looking to finance some sort of a purchase or pay off debt at a lower APR, personal loans are one option that’s worth exploring.
More than 20 million Americans currently have one, and with advertised interest rates as low as 5 percent (though the average is closer to 9.4 percent), they provide a significant savings as opposed to charging a purchase. Consider that the average credit card interest rate clocks in around 18.6 percent – about double the average personal loan rate.
So, is a personal loan right for you – now or in the future? Here’s a look at some considerations that you need to keep in mind:
Your Credit Score
As is the case with any type of loan, your credit score will dictate whether you get approved for it at all, and if you do get approved, what your interest rate will be. The better your credit score, the lower your interest rate, and vice-versa. If you have exceptional credit, it’s not uncommon to be approved for a loan closer to the 5 percent APR that we shared above. But if your credit is less than stellar, you could be looking at an interest rate of upwards of 30 percent.
Payback Time
Another factor that influences your APR is how long you plan to pay back the personal loan. Most personal loans are written so that the borrower has anywhere from six months to 7 years to repay them. The faster you can pay it back, the better your APR is likely to be (not to mention your long-term savings based on paying less interest over time).
Are There Any Extras?
While most personal loans don’t have any other fees aside from the interest rate, some do leave borrowers on the hook for a sign-up fee. This is usually a one-time fee that is eventually deducted from your total loan amount, but it can be a bit of an upfront expense. Most loans that have these origination fees charge anywhere from 1 to 5 percent. The experts typically advise borrowers to avoid personal loans with origination fees.
Is This the Best Choice?
While personal loans do make sense under the right circumstances, the biggest question you’ll have to answer is whether or not it’s the best choice for your situation. For instance, if you’re looking to pay off credit card debt with a personal loan, a balance transfer card might be a better option. You can often find promotional deals with 0 percent APR for several months. You might even look into credit card promotional offers, as many entice consumers to sign up with zero interest for six months to a year. If you’re confident you can pay back an expense within this timeframe, it might make sense to go this route versus paying interest on a personal loan.
