As interest rates on credit cards increase to as high as 30%, people continue to look for alternatives to credit cards. One such alternative is a personal loan, which is one of the many ways for an individual to borrow money. Generally, the borrower receives a lump sum payment from a lender and makes monthly payments to pay it off. There is a fixed payment and a fixed payment schedule.
Personal loans have a fixed amount.
Personal loans are usually small loans and can be used to finance anything, such as a car, renovations to a home, unexpected expenses, or a variety of other things. The amount you are able to borrow for a personal loan can range anywhere from as low as $1000 to as high as $50,000. How much you are able to borrow depends on the lender and your credit rating. The better your credit score, the more money you can borrow for a personal loan.
Personal loans usually have a fixed interest rate.
Although some personal loans come with a variable interest rate that changes periodically, most personal loans have fixed interest rates. This means the interest rate is locked and doesn’t change for the term of the loan. Similar to the loan amount, interest rates on personal loans are dependent on your credit rating. The better your credit score is, the lower your interest rate will be.
Personal loans have a fixed repayment period.
A personal loan is typically a short term loan between one to five years. Repayment is a fixed amount of monthly installments over a set term. Longer repayment periods lower your monthly loan repayment, but they also mean that you pay more in interest for borrowing longer.
Here are some of the reasons why people take out personal loans:
- They have no or bad credit.
- Pay less interest. Depending on your credit score, some personal loans will come with a lower interest rate than credit cards. Read more about personal loan interest rates.
- They want to consolidate a number of other loans into one loan. This will allow them to make one payment instead of multiple payments. This type of loan is also called a debt consolidation loan.