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Key takeaways:
- Personal loans can be a smart option for debt consolidation, emergency expenses, home repairs, and other large one-time costs.
- Comparing personal loans with credit cards, personal lines of credit, and other borrowing options can help you choose the right fit.
- Before borrowing, consider the rate, fees, repayment term, and whether a secured or unsecured loan makes more sense for your situation.
However, before you borrow money, it’s important to consider all your options. Is a personal loan truly what’s best in your situation?
How Do Personal Loans Work?
A personal loan is a type of installment loan. It means you get a lump sum of money that you pay back with monthly payments. You can get a personal loan through a bank, credit union, or online lender.In most cases, personal loans come with fixed rates. You’ll pay the same interest rate throughout the entire term of the loan, which can be anywhere from 24 to 84 months.
A personal loan can be secured or unsecured. A secured personal loan is backed by collateral, like a lien on your car or home.
On the other hand, an unsecured personal loan is backed by your signed promise to pay. It's also called a signature loan. These unsecured loans can be more expensive and require good credit because the lender is taking more risk.
How Can You Use a Personal Loan?
Other loan products are often created for a specific purpose, like a student loan or home mortgage. For example, you can spend student loan proceeds only on defined educational expenses, and a home mortgage only to buy a home.With a personal loan, you’re free to spend the money as you see fit.
Debt Consolidation
You may have other debt, especially if it has a higher interest rate, that you'd like to consolidate and pay off. A personal loan will let you do that, likely at a lower overall cost. Of course, lower interest rates are never guaranteed, but debt consolidation and payoff are always a good thing.You can use a personal loan as a way of refinancing a specific loan, or borrow enough to pay off multiple credit cards or loans.
Special Life Events
Do you have upcoming wedding expenses, home repairs, or something else? We all have expected and unexpected major expenses from time to time.They can be happy expenses like weddings, honeymoons, or a new baby. Or, they can involve a new roof, a new transmission, or medical bills. Either way, a personal loan can help you cover them without high-interest credit cards.
Home Repairs and Renovations
If you have a remodeling project planned or need to cover the cost of some repairs, a personal loan can be a good option.Home equity loans and HELOCs are often used for home renovation and repair projects, but you may not have enough equity in your home to qualify yet, or you may not want to use your house as collateral.
Major Purchases
A personal loan can finance a major purchase, like a new computer you need for work or furniture for your home.The alternative is to charge a credit card to cover these purchases, but a personal loan is a good way to avoid maxing out your credit card.
Emergency Expenses
Car repairs and appliance replacements are another common reason to get a personal loan. You can usually get the money quickly, which can help you cover urgent costs without relying on high-interest credit cards.How Do Personal Loans Compare to Other Options
| Borrowing option | Best for | How it works | Main advantage | Main drawback |
| Personal loan | Large one-time expenses, debt consolidation, emergency costs | You borrow a lump sum and repay it in fixed monthly payments | Predictable payments and often lower interest than credit cards | You get one fixed amount, and some loans have fees |
| Credit card | Everyday spending, small purchases, short-term borrowing | You borrow as needed up to a credit limit and repay over time | Very flexible and easy to use | Usually higher interest if you carry a balance |
| Personal line of credit | Ongoing or repeat expenses, or borrowing only what you need over time | You get access to a set credit limit and can borrow, repay, and borrow again as needed | More flexible than a personal loan because you don’t have to take the full amount at once | Usually has variable interest, so payments can change |
| Home equity loan | Larger home-related expenses | You borrow against your home’s equity and repay in installments | May offer lower rates than unsecured borrowing | Your home is used as collateral |
| Auto loan | Buying a car | The loan is tied to the vehicle purchase | Designed specifically for car financing | You can usually only use it for a vehicle |
| Payday loan | Very short-term cash needs | Small loan due on your next payday | Fast access to cash | Very expensive and risky compared with other options |
| Borrowing from a friend | Small, short-term needs or emergencies | You borrow money informally and repay it based on an agreement between you | May or may not be interest, flexible repayment | Can strain the relationship, and not everyone may be in a position to lend you money |
Personal Loans from Power Financial Credit Union
When you need financing for special projects or debt consolidation, turn to your family at Power Financial Credit Union.A Power Financial Credit Union signature loan or secured loan will give you low rates and up to 60 months to pay. The rate will stay the same, so you can budget for a stable monthly payment.
We also offer personal lines of credit and credit cards if you think these options might be a better fit for you.
Visit one of our Power Financial Credit Union locations for personalized advice on your lending and credit options.