A personal loan can be used in multiple ways – to help finance a house renovation, pump in money in a small business, consolidate debt, pay for a vacation or wedding, etc. Compared to other loans, such as a home equity or credit card loan, a personal loan is unique in different ways. Keep reading to learn how.
Fixed Interest Rates
Personal loan interest rates make the loan arrangement different from a home equity loan, for instance, which usually come with variable interest rates. The “variable” aspect of it means your interest payments could vary based on the changes in the economy. Variable-rate loans look attractive initially since the rates are lower, to begin with. However, the interest rate (and the subsequent payment) could go up later, rendering the finance arrangement costlier and riskier over a period.
Fixed Repayment Period
Personal loans must be repaid within a certain period, which is usually a year to five years. During the period, you would be making fixed payments monthly. This sets personal loans apart from credit cards. With credit cards, you make minimum payments that barely bring down your total debt burden linked to the card. If you would like to know when your loan would be paid off, you should be looking at personal loans.
A Boon for Small Businesses
A personal loan is an easy-to-access traditional form of finance. Personal loans help small businesses or budding entrepreneurs get rolling with their venture quickly. Typically, businesses without a brand value or market recognition find it extremely difficult to borrow money from banks. The great business idea they have mean almost nothing to banks. Banks and other traditional lending institutions usually like to see revenue and sales figures, which fledgling firms don’t have. These small businesses, therefore, turn to personal loans, leveraging their personal finances and credit. The best part is that the interest rates attached to personal loans drawn for business purposes are usually tax-deductible.
Home Improvement Loan
A personal loan is a new form of home improvement loan. Not many years ago, building a deck or remodeling your kitchen would entail borrowing funds based on the equity in your house. However, with stricter home loan requirements and real estate values plummeting in the US and other parts of the world, getting a loan based on home equity has become a lot more cumbersome or effort-intensive. This is why several borrowers are shifting focus toward personal loans to buy their new home or renovate their existing properties.