Should I take out a personal loan? Is a personal loan right for me? Are personal loans good or bad?
I’m going to answer all of those questions and give you the information you need to make an educated decision.
I’ve spent over 20 years as a financial advisor and I’m the host of a daily podcast with finance as a major topic, and I still knew little about personal loans. If I’m being honest, a big part of me thought they were negative and predatory, much like pay-day loans.
To educate myself, I invited Bobby Ritterbeck, the President of Best Egg personal loans, to be a guest on my podcast (you can find his episode here).
Our conversation completely changed my perception of personal loans, at least personal loans from top-tier providers like Best Egg.
Some of the key takeaways from our conversation are:
- People take out personal loans for three main reasons
- To consolidate debt (credit cards)
- To pay off medical bills
- To do home improvement projects
- Most folks who take out personal loans from Best Egg have good credit (640 and above)
- Lenders are interested in providing loans to folks who can pay the money back on the agreed upon terms. It’s good business for them to select credit-worthy borrowers
I was glad to learn top-tier personal loan providers work hard on the front end to make sure they’re a good fit for their borrowers and the loan will help put their client in a better financial position.
One final thought Bobby shared was this; if you ever find yourself in a difficult financial situation, reach out to your lenders to let them know. Because, he said, it’s likely they’ll work with you to find a mutually beneficial solution.
Here’s what I want.
I want you to read through this and to then make an informed decision whether or not a personal loan is right for you.
If you decide it is, I hope you follow the steps I lay out to integrate it into your overall financial situation so that you’re positioned for success.
Here’s what I’ll cover:
- How do personal loans work?
- What are the benefits of a personal loan?
- Should you take out a personal loan?
- How a personal loan fits into your overall financial situation
- Additional resources
Let’s get into it
How do personal loans work?
A personal loan is an agreed-upon amount of money borrowed from a lender that commonly has a fixed interest rate and set term for repayment. They are “unsecured” loans, meaning they aren’t tied to a physical asset like a house or car.
While there are a lot of different companies providing personal loans, here’s what I mean when I say “top-tier.” I mean companies whose business models are lending money to borrowers who they feel can and will pay back the loan under the agreed-upon terms. SoFi, Marcus, Upstart and Best Egg are four that come to mind.
Personal loan amounts can range from $1,000 to $100,000.
Interest rates on these loans can vary from 5.99% to 35.99%
Repayment terms range from 12 to 84 months.
The most common reasons for taking out a personal loan are to pay off credit card or medical debt, consolidate debt, pay for a home improvement project, or to help with emergencies.
What are the benefits of a personal loan?
A personal loan can save you money by offering you a lower interest rate than your current debt. For example, if you’ve got $5,000 worth of credit card debt with an 18% APR, paying that debt off with a personal loan of 6% could be a prudent decision.
A personal loan could simplify your finances by consolidating multiple accounts into one. This is a matter of preference, but many people like only having one payment versus having to make multiple.
A personal loan could give you the capital you need to complete a project at home. Many home improvement projects can be expensive and people don’t want to invest all of their liquid capital. In this example, a personal loan could be a good fit.
Finally, successfully making your payments over time can help to improve your credit score.
Should you take out a personal loan?
It’s highly possible you’re reading this because you’re trying to answer this question.
We (humans) make many financial decisions based on emotion versus logic. While this is true, we should work to avoid emotional decision making. When making this decision, do it logically.
As you’re evaluating your options, go through all the numbers and determine the total costs of the loan you’re considering
- Factor in the interest you’ll pay, as well as any fees or additional expenses
- If you’re paying off other debts, make sure you’ll actually be saving money by replacing them with this loan
- If you’re using the loan for home improvements, make sure the improvements will increase the value of your home
If, after doing those calculations, a personal loan will improve your financial situation, it could be a brilliant solution for you.
How a personal loan fits into your overall financial situation
When making all financial decisions, I want you to think about them in the context of your overall financial situation, instead of thinking of them in a vacuum.
Should you decide to move forward and apply for a personal loan, I encourage you to think about and complete these steps as well.
- Get a clear picture of your cash flow. Review your spending over the past 12 months and look for any irregularities or spending that’s no longer serving you
- Set up and maintain a personal budget. Check out our Get a Budget Course if you’d like additional support
- Review your credit report and work towards improving your score. Check our Partner Dovly for additional support
- Get clear on your goals and values. You can access our Goals course and Values course at no cost
- Develop a plan for getting out of debt. You can access our Get Out of Debt course at no cost. You can also work with one of our Partners Woven to help make this happen
- From there, create a plan to get on track to meet all your saving and investing goals. You can work with one of our Partners Ontrack to put your plan together
Following these steps will help you integrate this decision into your overall financial picture. You’re considering this loan to help you move to a better financial future. Following these steps will assist you on your journey.
It’s my desire to help you get where you want to go financially. If a personal loan is the right tool to help you and your current situation, going with a top-tier provider like Best Egg is a sound choice.
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
Connect with one of our Certified Partners to get any question answered.
If you’d like help getting on the same page with your partner, check out our Same $ Page Course.
If you’d like to help your kids get good with money, check out our Teaching Kids about Money course.
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