A personal loan may be worth considering if you’re in a tight spot and need a lump sum of cash. However, like any debt, there are costs and fees associated with getting a personal loan. This includes the interest you’ll have to pay, plus any origination fees fees that you’ll be charged. Learn more about how much a personal loan costs, when you should apply for one, and alternatives to personal loans.
A personal loan can be a good way to get a lump sum of cash.
Interest rates on unsecured personal loans are higher than many other types of loans.
It doesn’t always make sense to get a personal loan; consider other options and crunch the numbers to see if it’ll be the right fit for you.
What Is a Personal Loan?
A personal loan is a type of loan where you borrow a lump sum of money. You then pay it back in installments over time. There are two different types of personal loans. Unsecured loans aren’t tied to any collateral, and their interest rates tend to be higher. Secured loans use something you own as collateral, such as your car or home, to ensure that you’ll pay back the loan.
How Much Does a Personal Loan Cost?
There are several costs associated with personal loans:
Interest: The major cost of money you borrow is interest. This is a percentage of the principal amount borrowed. It is charged for as long you borrow the money. The interest rate on your loan depends on a variety of factors, including your credit history, the amount you’re borrowing, the length of the loan, and your income.
Origination fees: An origination fee is assessed by some lenders in order to start up your loan. While you’ll commonly see this with mortgages, it can also be found on some personal loans.
Documentation fee: This fee may be charged to process your loan paperwork.
Late fees: You’ll need to pay additional fees if you make a late payment.
For reference, the average interest rate for a 24-month personal loan was at 11.48% in May 2023, according to the most recent data from the Federal Reserve.
When Should You Choose a Personal Loan?
A personal loan can be a solution when you need a quick injection of cash. However, because interest rates tend to be higher than with other loan types, you’ll want to avoid acquiring an unsecured personal loan if you’d qualify for a different loan type.
An example of this is an auto loan; because these loans are secured (the lender uses your vehicle as collateral), they charge less interest. According to the Federal Reserve, the average interest rate for a 60-month car loan was 7.81% in May 2023.
However, there are times when a personal loan can make sense. If you’re trying to consolidate higher-interest debt, a personal loan can save you money while simplifying your payments.
This is especially true if you’re holding onto credit card debt. The average interest rate for a credit card is 20.68%, according to the Federal Reserve, which is nearly double that of a personal loan. In this case, you’d be saving a lot of money by opting to open a personal loan and paying off your credit cards.
Other situations in which a personal loan makes sense include completing home improvement projects or building credit.
Compare Personal Loans Alternatives to Personal Loans
There are other ways to borrow money if you’re in a pinch, including using credit cards or home equity loans.
It’s not usually a good idea to rely on a credit card to borrow money because credit card interest rates are so high. However, some credit cards feature special offers that allow you to make 0% interest purchases or balance transfers for a limited time. These can be an option as long as you’re sure you’ll be able to pay off the balance in time.
Home Equity Loan
If you own a home, you may be able to qualify for a home equity loan. These loans tap into the equity you have in your home to grant you funds. Like a personal loan, you’ll receive your money in a lump-sum deposit and will follow a fixed payment
schedule to pay back the loan.
You’ll also be charged interest, but since a home equity loan uses your property as collateral, interest rates are lower than you’ll find on unsecured personal loans.
What Is the Average Cost of a Personal Loan?
The average cost of a personal loan depends on a variety of factors, including your interest rate, the length of the loan, the amount you’re borrowing, and any additional fees the lender charges. According to the Federal Reserve, the interest rate on a 24-month personal loan was 11.48%, as of May 2023. At that rate and term, a $20,000 loan would require a monthly payment of $936.62 and total interest paid of $2,478.88.
What Is a Good Personal Loan Interest Rate?
The current average interest rate for a 24-month personal loan is 11.48%, according to the Federal Reserve. Anything less than this would be considered a good interest rate.
Can You Pay Off a Personal Loan Early?
It can be possible to pay off a personal loan early, but before doing so you’ll want to check for any prepayment penalties. These aren’t found in all loans, but you’ll want to read your contract to be sure; a prepayment penalty will charge you if you choose to pay off your loan early.
What Fees Are Associated With Personal Loans?
Some common fees associated with personal loans include interest, origination fees, documentation fees, and late fees.
What Are the Risks of a Personal Loan?
The biggest risk of a personal loan comes when it’s time to make payments. If you fall behind on payments, your credit score can be negatively impacted.