If you've taken out a car loan from a bank or credit union, you've taken out a personal loan. Personal loans also have many other financial uses. They can help you repay other types of debt including high-interest credit cards. They can also help you manage one-time expenses, especially major purchases.
What is the difference between a personal loan and a line of credit?
A personal loan is a fixed sum provided by a lender that is payable in cash or directly into your bank account. Some personal loans are paid directly to retailers for certain items, including appliance purchases or college tuition. You need to pay the loan back in fixed monthly payments for specified terms which range from 12 to 60 months. A personal loan has a start and end date.
A line of credit is a revolving credit account. That means that a lender has agreed to make a certain amount of money available to you when you need it. You don't have fixed monthly payments with a line of credit, but you will be expected to make minimum monthly payments.
What are secured and unsecured personal loans?
Lenders offer secured and unsecured personal loans. A secured loan means that the loan is secured by a piece of property, ranging from a house to a boat, car, or bank account. If you do not pay the loan bank, the lender can take the property or funds in the account. An unsecured loan has no property backing the loan amount.
Unsecured loan applications usually rely on credit scores. The better your credit score, the larger a loan and better interest rates you're likely to be eligible for: another reason for keeping good track of your credit score.
When could it be a good idea to take out a personal loan?
Many people use personal loans for major purchases, like college tuition, home renovations and car or appliance loans. You can also use a personal loan to pay off high-interest credit debt, potentially reducing your monthly payments. Interest rates on personal loans may be half the amount of some high-interest credit cards which could significantly lower your monthly payments.
If you're paying down a $4,000 balance on a credit card with an interest rate of 19.99%, making no new charges, a personal loan for $4,000 could allow you to save hundreds of dollars in interest charges.
What are some risks in personal loans?
When you're looking for a personal loan, don't just look at the interest rate, also be sure you understand the lender's additional fees and administrative charges. Fees added to interest may raise the total amount of finance charges to more than a higher-interest credit card.
If you sign up for a variable rate personal loan, your interest rate can change any time the Prime Rate increases. The Prime Rate stayed the same throughout 2016 and part of 2017 but has increased five times since then. Variable loan payments usually increase every time the Prime Rate increases. You could find yourself unexpectedly challenged by new higher monthly payments, so be especially careful to build in a payment "cushion" when accepting a variable rate personal loan.
Whether you're thinking about a major purchase or you've got college costs coming up, a personal loan could be a good choice to finance a one-time payment or purchase. You can also use personal loans to better manage high-interest credit card debt. Find out your choices for personal loans, interest rates, and credit cards through Rates.ca.