Attractive rates and increasing competition between lenders are bringing the personal loan back to the table for many American families. Millions of Americans are choosing a personal loan to consolidate credit card payments, transfer balances away from higher-interest credit cards and pay for expenses such as vacations and weddings.
If you are in need of a loan and like the idea of financing that’s not tied to your home or car – where you avoid the threat of foreclosure or repossession if a payment is missed – then a personal loan may be a good fit for you.
How Your Rate Is Determined
The lending company determines the rate for your personal loan. Some lenders may use factors such as your credit score, credit history, income, and existing debts to decide what your interest rate will be.
The better credit you have the more likely you are to get a personal loan that has a favorable rate1.
Lenders may evaluate the following variables when reviewing a personal loan application:
- How much money is requested and the time period requested to pay off the loan.These two factors can have a big impact on monthly payment options. See examples with this Monthly Payment Calculator.
- Your income and financial picture.The lending company uses this information to make sure you can afford the loan you’re requesting.
After determining if you qualify, the lender will set the interest rate for your loan based on your personal financial situation. At that point, the lending company will contact you with their decision so you can decide whether the loan makes sense for you.
Paying Off Credit Cards and Expenses
A common reason people use personal loans is to pay off credit cards , especially for cards whose interest rates have increased significantly due to a late or missed payment.
With a personal loan, you could get a lower rate than many credit cards, and that can help you budget more easily thanks to a consistent payment amount.
To recap, here are common reasons to consider a personal loan to start your path to savings:
- Save money with fixed rates.When you convert the balances on higher-interest credit cards over to a fixed-rate personal loan, you could significantly lower your interest rate. This helps you save money by paying less interest.
- One fixed payment.The monthly payment for a personal loan stays the same each month so you can easily budget for it. When you use a personal loan to consolidate multiple credit card balances, it conveniently turns many payments into just one each month.
- Getting out of debt.Personal loans are a good way to pay off credit cards so you can help put yourself in a better financial picture. But they’re not going to be as big an advantage if you continue building up more debt while you pay off your personal loan.
- No collateral needed.You don’t need to put up a major asset (like a house or a car) to qualify for a personal loan at a good rate. This can be particularly helpful if you’re just starting out.
Here’s a quick comparison to other financial products to help you decide whether a personal loan is the right choice for you:
- A credit card with a 0% APR for 12 months is a good choice if you can pay off a transferred balance or purchase in that time frame. However, interest charges afterwards can make personal loans cheaper if you need more than a year to pay it back. Nationally, the average credit card interest rate has been roughly 15.68%2.
- Secured loans such as mortgages and home equity lines of credit typically let you borrow more and have good rates.
But it is important to note that if you fail to make a payment, you risk losing your home or other collateral.
Every finance option has its benefits and drawbacks, but the personal loan excels with flexibility and rates.
Simplify Your Financial Picture with a Personal Loan
A loan might not be the first thing you think of when financing these expenses, but it may be able to keep you fiscally fit because you know your term and monthly payment. This allows you to plan the payment for the entire event — whether it’s an ever-growing wedding guest list or once-in-a-lifetime experiences in a foreign country — without coming home to a shocking bill on a credit card or not realizing that you drained your bank account.
It’s a smart financial alternative because it helps you confidently cover the cost of large expenses while giving you the ability to select a loan repayment term that’s affordable. Plus, it gives you the added advantage of potentially locking-in better fixed interest rates (especially compared to putting all of those expenses on a higher-interest credit card that you can’t pay off in a single month).
Discover Personal Loans have already helped half a million Americans. To see how Discover ranks against other options, take a look at this at-a-glance comparison chart to determine how a personal loan could help you confidently reach your financial goals.