You may be looking to renovate your kitchen. Or perhaps fund a big-ticket purchase. Maybe an emergency has arisen. It could be that you wish to consolidate your high-interest debt into a lower monthly payment.

For all these circumstances, and many more, an unsecured personal loan can be helpful, providing funds quickly without the need for collateral. According to PNC Bank’s Harjas Sidhu, Head of Personal and Student Lending, this option can prove a smart idea under the right circumstances.

“Personal loans are generally structured as term loans, or lump-sum loans. They are also referred to as installment loans. Regardless of what they’re called, it means you get all the funds at once, then pay the lender back in fixed amounts on a predetermined timeline.”

Is a personal loan appropriate for your situation? First, it’s important to be clear on the nature of what a personal loan may entail.

Debunking Misconceptions

There may be some mistaken beliefs about personal loans, such as how a personal loan may negatively affect your credit rating. Or, that it requires a lengthy application and approval process. Or, that you will be charged high interest rates. Yet, often, the opposite is the case in each instance.

  • If you make payments consistently and on time, a personal loan can help build your credit rating.
  • The personal loan application process is usually quick and relatively simple.
  • Personal loans tend to carry lower interest rates than credit cards. This makes it a potential tool for eliminating high-interest credit card debt, as well as helping out your monthly budget and cash flow by lowering payments.

What To Know

Utilizing personal loans may offer advantages over other credit options. However, like any other financial tool, it’s important to know how a personal loan works.

  • If you have time, saving for a major purchase or event may prove the better move than taking out a personal loan. Over the long term, you’ll avoid interest expense, fees, and monthly payments.
  • Unlike mortgages or car loans secured by the property being purchased, unsecured personal loans do not require collateral. As a result, interest rates can vary widely and may be higher than those of a secured loan.
  • In addition to interest, some lenders may charge application and origination fees and prepayment penalties. Make sure you fully understand the terms of the loan before signing.
  • A personal loan, like any other loan, may increase your debt-to-income ratio, which could subsequently affect your future borrowing ability or result in higher interest rates on any future loans.

When Does A Personal Loan Make Sense?

Equipped with this knowledge, what are those occasions when a personal loan has a place in your financial toolbox? Here are just a few of many possibilities:

  • Paying off credit cards. Credit cards charge interest that’s usually higher than that of a personal loan. By taking out a personal loan, then applying the funds to pay off credit card balances, your monthly loan payment will typically be lower. At the same time, you’ll pay less in interest. 
  • Home improvements. Is that kitchen looking out of date? Roof need repairs? These improvements can potentially add to your home’s overall value. If so, a short-term personal loan could be a solid long-term investment.
  • Your furnace or air conditioner might need replacement. Or an unexpected medical expense has arisen. As Sidhu points out, “Plan as we may, there are circumstances no one can anticipate. In these situations, when used responsibly, a personal loan can get you through a difficult time without making a big dent in your overall cash flow.”

On the other hand, when might a personal loan prove a less than ideal option?

  • Discretionary purchases. When weighing a discretionary purchase, consider your total financial picture and if a personal loan is the right option.
  • Paving the way for overspending. It’s one thing to use a personal loan to pay off credit cards in order to reduce monthly interest payments. It’s another thing entirely to pay off your credit card, only to start accruing a balance on that credit card all over again. Doing so is piling more debt on top of debt you already have.
  • When you are struggling financially. If you’re already having difficulty managing money, then a personal loan may simply make matters worse since a personal loan will be a debt that needs to be repaid. Look carefully at your overall financial situation and consider other measures if you can’t afford the monthly payments.

Getting it Done

Sidhu notes that, Before you start the application process for a personal loan, be sure you are comfortable with the amount and purpose of the loan. You may want to consider whether you plan to use it for things with potential long-term benefits – like home remodeling or consolidating debt.

Think a personal loan makes sense for you? These are the next steps to take.

Compare rates and terms. Once you have decided that a personal loan may be appropriate for your situation, you can get started by comparing interest rates, terms and fees among lenders without needing to complete an application. Although rates are not guaranteed at this stage, this tactic avoids any potential effect on your credit rating.

Apply to the financial institution offering the most competitive rates and loan terms. “After you’ve reviewed initial offers, it’s a good idea to limit your applications to one or two lenders, as additional credit inquiries can negatively impact your rating,” Sidhu adds. “At this stage, you’ll need to document your income and other assets, credit card and other debt. The lender will review your credit report and, if approved, you will need to sign loan documents to receive the funds.”

Expect quick approval and funding. You can expect a decision from your financial institution quickly – often within a few business days. Then, funds are released promptly in a lump-sum.

If you’ve considered carefully and feel a personal loan is the right option for your needs, then PNC Bank is ready to help. Visit our personal loan products, rates, and terms for an overview.