Discover the personal loans benefits and why they are also a good option when buying a house!
People generally take out conventional mortgages to finance their dream homes. However, personal loans can be a smart alternative for those who do not qualify for traditional mortgages or want more flexibility and speed in the process.
If you are wondering why personal loans are gaining popularity in the housing market, then you have come to the right place! In this article, we will explore the various benefits of using a personal loan and give you some tips on getting approved. So, read on!
Can You Use a Personal Loan for a Home Purchase?
Technically speaking, yes—you can use a personal loan to buy a house. You can use it to cover the down payment and closing costs, which can be a significant portion of the total purchase. However, there are some things to consider before deciding on this approach.
Now, why would anyone choose it over a traditional mortgage? It all comes down to the personal loans benefits that you will not find in other types of financing options.
9 Personal Loan Advantages That Are Worth Noting
A personal loan can be used for any purpose, including buying a house. So, why should you consider it for this particular reason? Here are nine personal loan advantages that should convince you.
1. More Flexibility
Personal loan uses are not restricted to just one purpose, and this flexibility extends to buying a home as well. With it, you will not be locked into a long-term mortgage, and you can change your repayment terms if needed. Plus, you do not have to use the entire amount of the loan on the house, as you can also use it for other expenses related to homeownership.
For example, you can use a personal loan to cover the down payment and closing costs, but also for furniture, renovations, or unexpected expenses that may come up during the moving process. This flexibility can be especially useful for first-time homebuyers who may not have enough savings for all of these expenses.
2. No Requirement for Collateral
Unsecured personal loans do not require collateral, unlike traditional mortgages. This means that you will not have to put any other valuable asset on the line as security for the loan, such as the house. This can be a significant relief for those who do not want to risk losing their home if they default on the loan.
Without the need for collateral, the approval process for a personal loan is also typically quicker and more straightforward. So, if you are eyeing a property that has a lot of competition, being able to secure financing quickly can give you an edge over other buyers.
3. High Borrowing Limits
Unlike credit cards, personal loans have higher borrowing limits that can be used to start financing a home purchase. You can generally borrow up to $100,000, which can be more than enough for a down payment on a house or other related expenses. However, you should remember that the amount you can borrow will depend on a number of factors, such as your debt-to-income (DTI) ratio, credit score, and income stability. Lenders will also consider the type of personal loan you are applying for, as secured loans may allow you to borrow more.
4. Ability to Receive One Lump Sum with a Fixed Rate
One of the pros of personal loans that make them very attractive to home buyers is that they offer a fixed interest rate. This means that you will have a set amount of money to pay back each month that will not change during the loan term. This allows for easier budgeting and planning and can save you from potential shock if interest rates suddenly increase.
You also receive the entire loan amount in one lump sum, rather than having to draw on a line of credit as needed. This can be helpful if you want to know exactly how much you have available to spend on their home purchase and other associated costs.
5. Competitive Interest Rates
According to data from Forbes, the interest rates for personal loans can be as low as around 5%, depending on the lender and your creditworthiness. These rates are typically lower compared to credit card interest rates, which can be as high as 30%.
Additionally, personal loan interest rates do not fluctuate like credit cards or adjustable-rate mortgages (ARMs). Plus, having a lower interest rate can save you thousands of dollars in the long run, especially if you are borrowing a large sum of money. Therefore, it is crucial to compare rates from different lenders and choose the one that offers the most competitive rate for your financial situation.
6. Extended Loan Terms
Most lenders will give you the option to extend your personal loan terms, which can provide more flexibility in your monthly payments. This can be beneficial for those wanting to spread out their payments over a longer period of time and potentially lower their monthly payments.
However, you should remember that a longer loan term may also result in paying more interest over time. It is best to consider your financial situation and evaluate if extending the loan term will truly benefit you in the long run.
Additionally, some lenders may charge additional fees for this privilege, so make sure to read all the terms and conditions before making a decision.
7. Quick Access to Cash
Traditional mortgages may take weeks or even months for approval and funding. On the other hand, personal loans are often released in a matter of days. This is because the application process is usually simple and does not require extensive documentation. If you are in a time-sensitive situation and need quick access to cash for a home purchase, a personal loan is an excellent option. This benefit also applies to covering unexpected expenses that may arise during the moving process, as you will have the necessary funds without lengthy waiting periods.
8. Ease of Management
Due to the repayment predictability of personal loans, managing them is relatively simple. You will know exactly how much you owe each month and can plan your budget accordingly. Most lenders also offer online account management tools, making it easy to track payments and make changes if needed.
There are already many things to manage and handle when buying a home, and having one less thing to worry about with a personal loan can make the entire process smoother and less stressful.
9. Opportunity to Boost Your Credit Score
Borrowing with personal loans can help improve your credit score, as long as you make timely payments. This is because they are considered installment loans, which means they have a fixed payment plan and term. This type of loan is viewed favorably by credit bureaus, and making regular payments can reflect positively on your credit report.
Diversifying your debt with a personal loan can also lower your credit utilization ratio, which is another factor that affects your credit score.
Considering the excellent advantages of personal loans, it is no surprise that many people turn to them as a financing option for a home purchase. However, take note that it also comes with responsibilities and potential risks.
Downsides to Taking Out a Personal Loan for a Home Purchase
The first thing that you need to be aware of is that a personal loan is still a debt and needs to be repaid. Failure to keep up with payments can result in late fees, damage your credit score, and even lead to legal action.
Additionally, some lenders may charge origination fees or prepayment penalties, so make sure to read the fine print before signing any agreements.
Moreover, if you have a high DTI ratio or a lower credit score, you may not qualify for the best rates and terms. This can result in higher interest rates and potentially more significant financial strain in the long run.
Borrowing with Personal Loans: Quick Tips to Ensure Approval
Like any other type of loan, it is essential to do your research and come prepared for the application process. Here are some quick tips to help you ensure approval for a personal loan.
Perform a Soft Credit Score Check
Before you speak with potential lenders, you should be familiar with your credit score. This will give you an idea of what interest rates and loan terms you may qualify for, as well as allow you to address any potential errors on your report that may affect your application.
You can perform a quick credit report check online using trusted resources, such as Annual Credit Report.com and Credit Karma.
Shop Around
As previously mentioned, one of the reasons for personal loans being popular among home buyers is the competitive rates they offer. Shop around and compare rates from different lenders to find the best deal for your financial situation.
Gather All Necessary Documents for Assessment
Lenders will ask for documentation to assess your financial capability, such as proof of income, employment records, and bank statements. Make sure to have these documents ready when you apply to expedite the process.
Work with a Reputable Mortgage Broker
If it is your first time applying for a personal loan or you are not familiar with the process, a mortgage broker is your best friend. They will work with you to find the best lender and loan terms for your needs. They can also help navigate through any potential complications or challenges that may arise during the application process.
Final Thoughts
The personal loans benefits for a home purchase are undeniable. However, just like any other financial decision, it is essential to carefully consider all factors and potential risks before proceeding with your application. Remember to do your research, shop around for the best rates, and work with professionals when needed. With a bit of effort, you can start on the right foot toward the best financing solution for your needs.
For more tips and information that you can use in your home-buying journey, feel free to check out our other posts!