A personal loan might be ideal for helping you reach your financial goals, but it’s also possible a different financial product might work better. As you consider the prospect of a personal loan, don’t forget to explore your other options.
Here are some alternatives to consider, along with some instances where they may represent a better deal:
Personal loans versus credit cards
According to Paul Gentile, president of Cooperative Credit Union Association, there are definitely times where a credit card may be better than a personal loan.
“A credit card can be used to purchase something, so that can offer more flexibility,” he says. Credit cards can also be a great deal if you pay them off monthly, he notes, since you have the potential to earn rewards. Lastly, credit cards can be beneficial for certain short-term purchases since many offer 0 percent APR for 12 to 21 months.
On the flip side, “a personal loan may be better for someone who wants to make a large, intentional purchase that they planned for.”
Personal loans also offer the benefit of a fixed payment and payoff date, whereas credit cards can literally tether you to payments indefinitely if you keep using them for purchases.
Personal loans versus HELOCs
As Gentile notes, HELOCs come with the advantage of interest deductions (similar to how you deduct mortgage interest) if you itemize your taxes. In contrast, interest paid on your personal loan is not tax-deductible. Rates on HELOCs may also be lower than those on personal loans, he notes.
A possible downside with HELOCs is the fact that some only require you to pay interest for years. “This means you may not be paying anything toward the principal,” Gentile says.
Some HELOCs also come with balloon payments at the end, and those big payments may be hard to handle. On the other hand, personal loans come with predictable, fixed monthly payments and no surprises.
Personal loans versus peer-to-peer loans
Gentile notes that peer-to-peer lending is really similar to a personal loan. Both things allow you to borrow a fixed rate of cash and repay it over a predetermined length of time.
But since peer-to-peer lending isn’t regulated as heavily, this could be worrisome, says Gentile.
Before you choose among personal loans and peer-to-peer loans, make sure you compare all related fees, all total costs and interest rates.
Personal Loans versus cash-out refinancing
Gentile believes that opting for a cash-out refinance is the best option for people committed to their properties in the long term, whereas personal loans are better for short-term financial needs.
There are risks to getting cash out of your home as well, he notes. “If home prices drop, you could end up underwater.”
On the other hand, refinancing your home to get access to your home equity could help you qualify for a lower interest rate than a personal loan. “You also get to write off your mortgage interest, so you get a tax deduction,” notes Gentile.
Check out this cash-out refi calculator from MagnifyMoney’s parent company, LendingTree.
Source – https://www.magnifymoney.com/blog/personal-loans/the-ultimate-guide-to-personal-loans1210109673/