A personal loan is a solid option if you are looking for a loan not tied to purchasing a specific thing, such as a home, car, boat, or recreational vehicle. A personal loan is a loan you can spend on practically anything. These loans may be secured or unsecured and are more challenging to qualify for than a typical credit card.

In addition to the option of secured and unsecured personal loans, borrowers still have other options, as they may elect a lump sum payment or a line of credit that allows them to draw cash from the loan on an as-needed basis. The great thing about a personal line of credit is that you only pay interest on the amount you borrow. However, the interest rate is generally variable, changing with the going market rate.

How Does a Personal Loan Work?

As previously mentioned, personal loans are more difficult to qualify for than credit cards. However, they are often for more money than an introductory credit card would provide. Things that impact a lender's decision include the following:

• Credit score.
• Income.
• Debt-to-Income ratio.
• Credit utilization (lenders prefer to see borrowers utilizing less than 30 percent of their available credit, for instance).

Borrowers need good to excellent credit to qualify for most personal loans, at least for unsecured ones. Secured personal loans may offer more flexibility when it comes to credit scores.

Most people use personal loans to finance large purchases, such as dream vacations, home improvements, weddings, etc., or to consolidate debt. These loans can be ideal for consolidating high-interest credit card debt, but only if you can secure a lower interest rate for your personal loan and work to repay the loan as quickly as possible without accruing new credit card debt on the cards you've just paid off.

You'll have to apply for a personal loan and wait for approval, though the Internet has made it possible to often get nearly instantaneous approval. If you're approved and agree to the terms, you can move forward and receive your funds. Terms you'll need to agree to include the following:

• Interest rates.
• Origination and other fees.
• Repayment timeline.
• Monthly payments.

The longer the term of the loan, the more money you will pay in interest over the life of the loan unless you repay the loan faster (assuming there are no fees for early repayment). Also, many lenders feel that longer terms represent a greater risk and offer lower interest rates for shorter repayment terms.

Benefits

Personal loans have a few benefits if you need money to fund life's little emergencies, create a little financial breathing room, or finance a dream for yourself or someone you love. The most significant benefits are listed below.

• Borrowing flexibility. Options for personal loans include secured unsecured, lump sum payments, and personal lines of credit.
• Lower interest rates than credit cards.
• There are few restrictions on how the money is spent.
• Offers faster approval and transfer of funds than other loan types.

Regarding flexibility, few loan types offer the benefits of a personal loan. However, these loans are not the best choice for all situations. Plus, there are a few drawbacks to keep in mind as well.

Drawbacks

The two major drawbacks for borrowers, especially those who have not yet achieved outstanding credit scores, are the following.

• Stricter lending standards than other types of loans and credit cards.
• It may require collateral or security, which risks your property.

As you can see, these are not insignificant drawbacks, but they are also not insurmountable. If you qualify for a personal loan, this type offers outstanding flexibility to meet your borrowing needs at various stages of your life.

Using Personal Loans Responsibly

The key is always to borrow money cautiously and repay money responsibly. This means avoiding the temptation to borrow more money than you can reasonably repay (with the interest and other fees associated with the terms of your personal loan). Pay attention to all the fine print before taking out a personal loan (or any loan) to know what you agree to when you accept the funds.

Alternatives to Personal Loans

If you're still not sure a personal loan is correct, there are alternatives to consider. Some excellent options include things like home equity lines of credit (HELOCs), credit cards (especially those with low introductory rates that allow you to transfer your higher-interest debt to the new card), home equity loans, and cash-out refinance loans that allow you to refinance your home while accepting cash for the equity you currently have in your home to use as you like. A personal loan is the preferred choice if you need money faster.