Personal Loans – Pros and Cons


Hey I’m Adam Jusko from ProudMoney.com and in this video I’m talking about the pros and cons of personal
loans. Before I do that I would ask you to please subscribe to our YouTube
channel if you’ve not already and if you have I thank you for doing so. So, I have
been getting a lot of solicitations recently in the mail for personal loans,
and here’s one I just got recently from City. As you can see, it is super shiny
and tempting. But is getting a personal loan a good idea or not? Let’s talk
about it. Basically what a personal loan is, is a loan to help you in most cases
consolidate debt, probably credit card debt, give you an installment loan at a
lower interest rate than you are probably paying on your credit cards now.
Citi here is telling me that I could get anywhere from, what, $5000 to
$25,000 in a personal loan. And the potential interest
rates that they quote were anywhere from essentially 10 percent to, I don’t know,
16 and a half or something along those lines. So if you’re someone that has higher interest credit card debt, if you can get a personal loan, get it at a
lower… get that loan at a lower rate and then take that money and pay
off your credit cards, then you have an installment loan that you have to pay
but it is at a lower interest rate. And so that’s basically how a personal loan
works, and that’s why you would get it is to consolidate that debt or to pay off
debt that you have at a higher interest rate, usually credit card debt. Maybe some other kind of debt as well. So anyway, the pros, then: obviously what I just said — you get to pay off your higher interest debt and get a lower interest
rate. The other part of this that I think a lot of people don’t necessarily think
about with personal loans is this could actually be something that can help your
credit score as well. If you have credit cards and you have debt on them at that
higher interest rate, it’s not so much the interest rate, but it’s having that
debt itself sitting on those cards. You may know that one of the aspects of your
credit score is how much of your potential credit you are using. So
if you’ve run up large debts, then you’re probably using a fairly large percentage
of your overall potential credit. So if you get a personal loan and you pay off
those credit cards, yes, you have a new loan, but you have paid down or paid off
those credit cards, so you no longer have that high credit utilization that you
had on the credit cards. In addition, you also have a new type of installment loan
that can help your credit mix. It’s no longer a credit card where you have that
ability to go up and down. It’s an installment loan more along the
lines of an auto loan or a mortgage, something where you have a fixed
payment every month that you have to make. And so it’s sort of a
different responsibility than a credit card, so it can actually help you in the
mix of different types of credit that you have. So those are both good things. Now the cons are somewhat cons, but they’re not cons
across the board. One of them is that you could have an origination fee on a
personal loan. It’s possible that you could pay anywhere from 1% to maybe 5 or 6% of the amount of the loan in order to get the personal loan. Now that’s
obviously not a good thing to sort of hear that upfront, but it still depends on what that interest rate is that you get. Oftentimes that origination fee can be rolled into the loan and it’s really just a factor in
terms of what you’re going to end up paying. So you may see
initially a lower interest rate but then there will be something within the kind of terms and conditions that should show you an APR that shows you
what you actually will pay when you consider the interest rate plus any
origination fees that have put in. So it’s not so much that this is
necessarily a con, but you need to be careful — if you see a lower interest rate
but there’s an origination fee, you need to make sure you understand
what the total costs are with a personal loan and don’t just get sort of
caught up by shiny objects that make you think that something is a better deal
than it is. So make sure you understand all the costs. There’s plenty of
opportunities out there to get personal loans that don’t have origination
fees, sort of depends on how good your credit is to some extent whether you can
do that. Citi here was willing to forward me some money without an origination fee, at least as far as I know they are, I did not go through the process of
actually doing it. The second potential con of having a
personal loan versus a credit cards in particular is… once you get a personal
loan, you have fixed payments that you have to pay every month that are a
certain amount. That flexibility that you have with credit cards goes away. So if you have less money next month than you had this month
or whatever, you still have to pay the same amount when you have the personal loan, because it’s every month, same thing, just like a car loan, just like a
mortgage, you have to pay. So you lose that flexibility with a credit card,
where you could say “alright I’m gonna pay 200 bucks this month but I
don’t have that much next month I’m only gonna pay a hundred this month.”
Now I say that is a con in terms of the potential to lose that
flexibility — on the other hand, if you have a lot of debt, maybe you need to be
in a position where you don’t have that flexibility, where you do have to make a
payment of a certain amount every month to get things paid off. That
flexibility of having a credit card that lets you revolve that balance every
month and make that decision as to whether you’re going to pay it off
completely or how much you’re going to pay off maybe is not a good thing for
you. So that’s sort of a pro and con, depending on who you are. No matter what, the situation is: the better your credit history, the better terms you are going
to get on a personal loan. So again it’s another reason for you to always be
thinking about keeping your credit scores high and doing the right
things in terms of making your payments and all that sort of stuff. Personal loans, any other kind of loan you want, the better your credit history the
better terms you’re going to get and the happier you are going to be. Overall we
like the idea of using a personal loan to consolidate your high interest credit card debt or any other debt you might have that is at a
higher interest rate than what a personal loan might be offering you. The
important thing to remember is that once you have a personal loan… so you’ve wiped everything off your credit cards now and you’ve got it all in that personal loan… just because your credit cards are now
down to zero doesn’t mean that it’s time to start using them again and
getting some new balances going. The whole reason that we’re
doing this is to try to get our debt down, and down at a lower interest rate,
so you don’t want to take on new debt if you get the personal loan. We’re not just
shifting money around so that we can get even further into debt, but you
probably knew that already. Thanks for watching. Please go to ProudMoney.com,
where we talk about other personal finance topics and credit card
reviews and all kinds of other stuff too. Thanks for watching. Bye.

2 comments on “Personal Loans – Pros and Cons”

  1. eljuancho2 says:

    Thank you very much, looking into using banks and private lenders money to buy assets.

  2. dwight taylor says:

    What a great video. Learn so much from what you do.

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