Are you struggling to find extra bucks to push your personal goals forward? Well, a personal loan may be an excellent way to inject more cash into your wallet. From purchasing an expensive toy to covering vacations expenses, there’s no shortage of ways you can use a personal loan to keep your life going.
And the good thing is, you no longer need to get dressed to hike to the bank and brace a bureaucratic, paper-laden application process. The internet and cutting-edge financial technology turned the tables. Today, fintech lenders offer the best personal loans with minimum requirements within a short call.
But like any other type of debt, a personal loan isn’t free money. At the end of the day, you’ll need to repay, with interest. So before you jump in, it helps to learn a few things about the bad and the good of personal loans so that you don’t get stuck with bad debt that doesn’t help your life move forward.
That’s the point of this article. We’ll walk you through everything you need to know about personal loans. Let’s get started!
What’s a personal loan?
A personal loan is a one-time lump sum that a lender advances to a borrower for personal use. Personal loans have fixed interest rates, and the money is repaid with equal monthly installments until the loan is paid off. Generally, personal loans may have repayment terms of 2-7 years, but online lenders have shorter terms of 2-60 months.
Generally, personal loans don’t require collateral, and anyone with a good credit score and solid income can qualify for the loan. APRs are usually in single digits but may go up to 35% depending on your credit profile.
What can personal loans be used for?
Unless your lender imposes some restrictions, you can use the money for any purpose you deem necessary. Common uses of loans include consolidating high-credit card debt, funding home improvement projects, and covering medical expenses. You can also use the money to finance a wedding or a family vacation.
Again, a personal loan can be used for business purposes. Since the loan is meant for personal use, some people may shy away from using the money to start or expand their businesses. The truth is, you can use personal loan proceeds to cover business expenses like purchasing inventory, office supplies, paying rent, or covering utility expenses.
What they don’t tell you about personal loans
Some things about loans are only spoken about in low tones. Some lenders may not even disclose these to you until it’s too late. They include:
Some lenders may require collateral
Personal loans are a type of unsecured debt. That means you won’t need to attach personal assets, like a car, or your house, as a lien to secure the funds.
While that’s good for the borrowers, it may not be good news to the lenders because they may lose their money if the borrower defaults. The lender may hire a collection agency or sue you to recover their money, but they can’t touch your assets.
To avoid these hassles, some lenders may require you to promise personal assets like your savings, a car, or a home to secure the debt. This is the case when you have a poor credit score or no credit history. If you default, they can sell the asset to recover their money.
Restrictions may apply
The rule of thumb is that these kinds of loans can be used for anything. But some lenders offer loans with clear exceptions on what the money can’t be used for.
However, some lenders may restrict against using loans for academic or business purposes. To avoid trouble, always read the lender’s fine print to understand their conditions.
Easier to sink into debt
Personal loans come with an increased risk of getting into bad debt. Since they are easier to qualify for and come with fewer restrictions, many borrowers may end up misusing the funds.
For instance, if you splurge the money on an expensive wedding ring or vacation, you’ll remain stuck with a monthly payment a few years down the line after the thrill of the event has faded away.
Interests are not tax-deductible
Generally, interest paid on those loans isn’t subject to tax deductions. That’s contrary to interest rates paid on small business loans, mortgages, and student loans. Unless you can prove that you used all the money to fund business expenses or home improvement projects, you won’t enjoy any tax break on personal loans.
It May not work well for business
While you can use a personal loan for business, mixing your finances with your business revenues isn’t a good idea. First, it won’t help you build business credit, and may complicate your bookkeeping and tax filing.
Again, personal loans have lower limits of up to $50,000 compared to business loans that offer up to $5million. That means you may not get enough money to fund your business expenses via loans
If you make personal guarantees and fail to pay as required, you may end up damaging your credit score or lose valuable assets. That may make it harder to secure money for personal use in the future.
Should you get a personal loan?
Like any other type of debt, a personal loan isn’t bad when used for the right purpose. Now that you know a few things about this type of debt, you can go ahead and borrow with confidence. If you need money for business expenses, you’re better off going for a small business loan. Visit the link above for a list of lenders that offer the best personal loans.