Benefits of Taking a Personal Loan

Why should you prefer a personal loan over common alternatives? Consider these benefits, but remember that the ideal credit product for any given situation depends on numerous factors, including borrower credit, income, assets, preferred repayment term, and intended loan or credit line purpose.

1. Potential for Higher Borrowing Limits Than a Credit Card

According to the Consumer Financial Protection Bureau’s report The Consumer Credit Card Market 2017, average credit line size in 2017 ranged from a little under $10,000 for super-prime borrowers, to about $6,500 for prime borrowers, to about $1,250 for subprime borrowers.

Each card’s spending limit falls within a range defined by the issuer or card network, with lower limits reserved for applicants who barely qualify for the card and higher limits for very well-qualified applicants. For instance, credit limits on a secured credit card designed for consumers with impaired credit might range from $300 for the weakest applicants to $5,000 for the strongest. On a no-annual-fee cash back credit card, limits might range from $2,500 to $10,000. On an ultra-premium travel credit card such as Chase Sapphire Reserve, limits might range from $10,000 to $50,000.

2. Potential for a Lower Interest Rate Than a Credit Card

Personal loan interest rates are typically lower than credit card interest rates for comparable borrowers.

Unsecured personal loan rates start at 5% or 6% APR for very well-qualified borrowers. By contrast, it’s rare to find even low-APR credit cards with regular APRs under 10%, regardless of applicant strength. Plenty of credit cards have low or no-interest introductory offers that last 12, 15, or even 21 months, but rates spike to 10%, 15%, 20%, or higher once the intro period ends.

3. Collateral Usually Isn’t Required

Unsecured personal loans don’t require borrowers to put up collateral. The consequences of defaulting on an unsecured loan are severe, but the loss of a vehicle, house, or priceless family heirloom isn’t among them.

4. Easier to Manage Than Multiple Credit Card Accounts

A single, fixed-rate personal loan funded in a lump sum is much easier to manage than multiple credit card accounts with different spending limits, interest rates, payment due dates, and issuer policies. If you know you need to borrow $25,000, why not apply for a single personal loan in that amount rather than four credit cards with spending limits of $6,250 apiece?

5. Predictable Repayment Schedule

Personal loans are installment loans with fixed interest rates, repayment terms, and monthly payments. At approval, you’ll learn precisely how much you’ll need to repay each month, how many monthly repayments you’ll need to make, and your total interest cost over the life of the loan.

Revolving credit lines, such as credit cards and home equity lines of credit, aren’t so predictable. The only constant is your monthly payment due date; your required minimum monthly payment depends on your credit utilization, and your interest rate is subject to change with benchmark rates.

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