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Before your next big expenses, it may be time to reconsider the personal loan.
Personal loans are more and more attractive option for borrowers with good credit. In the first three quarters of 2015, lenders provided $ 30.24 billion in personal loans to borrowers with prime and near-prime credit scores, up 67% from the same period in 2013 , according to an April report. analysis from the credit reporting company TransUnion. A June survey by Discover Personal Loans estimated that 60% of personal loan borrowers were in good or excellent financial health.
Borrowers use loans for a multitude of reasons. Discover found that a third expected to use a personal loan to buy a car, and 17% for medical expenses. Another 11 percent used the funds to consolidate other debts.
“Depending on how much you need and when you need it, taking out a personal loan can be beneficial,” said Greg McBride, senior analyst for Bankrate.com. “You want to cast a wide net and know what all your options are.”
The big potential benefit of a personal loan is the low rate, especially for consumers with credit card debt. For example, APRs start at 5.95% at SoFi on a three-year $ 10,000 loan; 5.99% at lenders, including Wells Fargo and Lending Club; and 6 percent at Earnest. For comparison, the average cash-back credit card has a rate of almost 17%, according to Bankrate.com, while “low-interest” cards average 12%.
“Generally speaking, it’s best to go for the lowest interest rate,” said certified financial planner Rick Kahler, founder of Kahler Financial Group in Rapid City, SD.
A second advantage is speed. Personal loan applicants can often get their money within 48 to 72 hours of applying, versus the month it takes to close a home equity line of credit or the week it takes to get a new credit card. credit in hand, McBride said.
“This rapid turnaround is a compelling advantage,” he said.
But a personal loan is not a solid victory.
Borrowers with good credit probably have options like a zero percent balance transfer card, or a Heloc loan or home equity loan (the interest of which may be tax deductible). A $ 30,000 home equity line of credit works at 4.74%, and a home equity loan of the same value works at 4.47%, according to Bankrate.
Potential borrowers should evaluate the options of banks and credit unions as well as online lenders. The latter issued $ 10.14 billion in loans in the first three quarters of 2015, according to TransUnion – $ 2.93 billion more than banks issued and a 520% increase from 2013. But there have been recent upheaval in the industry, with Lending Club subject to misfortune, including regulatory review and Formwork vouchers.
“You want to make sure you look at who is supporting the loan,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling. Check databases including the Better Business Bureau and the Consumer Financial Protection Bureau for ratings and complaints about the lender.
Evaluate all terms carefully before applying, Kahler said. Some personal loans offer variable rates, while others require collateral, which can put your car or home at risk if you can’t keep up with your payments. Many charge an upfront fee and there are limits on how much you can borrow.
The terms offered may also change after the lender has reviewed your credit and verified your income. “Ask yourself, ‘What is the real dollar cost that I am saving? ” “, did he declare.
It’s also a good idea to view debt as a warning sign that it’s time to reassess your finances, McClary said. Savings rates are low and many consumers do not have adequate emergency funds.
“Are you prepared to pay off this loan on time or sooner than expected while meeting your other financial obligations?” ” he said.