Personal loans don’t have the best reputation, lumped in with predatory lending and debt traps. But they’re not always a bad idea. In fact, financial experts say there are several hidden advantages that make personal loans a smart financial tool. The key? As with most things, you’ve got to use them correctly.
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GOBankingRates spoke with financial industry professionals to uncover the benefits most people don’t know about when it comes to personal loans from traditional lenders.
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No Collateral Required
One of the biggest advantages of personal loans is that they’re unsecured, according to Jared Navarre, CEO of Keyni.co and a serial entrepreneur who’s worked with major companies like Reebok, Adobe and Capital One.
“The magic of an ‘unsecured’ loan means you don’t have to risk losing your house, car or your signed headshot from the local weatherman,” Navarre explained.
This is a huge benefit compared to secured loans like mortgages or auto loans, where the lender can repossess your property if you default. With personal loans, your assets remain safe even if you run into financial trouble.
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A Better Alternative to Payday Loans
Personal loans shine as a safer option compared to predatory lending products that trap borrowers in cycles of debt.
“Personal loans typically have better terms and are a safer option than payday loans,” Navarre said. “Aka, save your kneecaps.”
While payday loans can carry interest rates of 400% or higher, personal loans from reputable lenders typically offer much more reasonable rates and longer repayment terms.
Lightning-Fast Access to Funds
When emergencies strike, personal loans can provide remarkably quick relief. Many lenders have streamlined their approval processes to get money into borrowers’ hands quickly.
“Some personal loans can fund as quickly as 24 hours,” Navarre shared. “Perfect for the inevitable emergency life may throw your way.”
This speed advantage makes personal loans particularly valuable for urgent expenses like medical bills, car repairs or home emergencies that can’t wait for traditional loan processing times.
Credit Score Benefits You Didn’t Know About
Here’s where personal loans offer a hidden advantage that many borrowers overlook: They can actually help improve your credit score through diversification.
“Though the exact algorithm the credit bureaus rely on is buried 10,000 miles below Space X, a personal loan can be good to add to your overall credit picture and has a potential to boost your overall score,” Navarre said.
The credit scoring algorithms favor having a mix of different types of credit. Think credit cards, mortgages, auto loans and personal loans. Adding a personal loan to your credit mix can demonstrate that you can handle different types of debt responsibly.
“I wouldn’t advise using this as logic to get one, but the algorithm does favor diversity,” Navarre added.
Personal Loans From Friends and Family: A Different Approach
While traditional lender personal loans offer institutional benefits, some people turn to friends and family for financial help. This approach comes with its own set of advantages and considerations.
Dutch Mendenhall, a bestselling author and founder of Omnico Golf, has experience with person-to-person lending and offered insights into this alternative approach.
“The advantage is, you can loan something to someone that you care about, and that you have a relationship with, and you can make a return,” Mendenhall explained, recalling his experience helping a friend buy a car 10-15 years ago.
The Reality Check
However, Mendenhall also talked about the importance of going into these arrangements with realistic expectations.
“You have to understand that if you’re going to give a personal loan, there’s a good chance that you may never get the money back,” he warned. “And you have to determine whether that amount of money is worth ruining a relationship with the person you gave it to.”
Key Considerations for Family Loans
Mendenhall recommended evaluating several factors before lending to friends or family:
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Financial capability: “I think you have to know what a person’s personal finances are — are they living within their means? So, if you loan it to them, it would make sense that they can pay you back.”
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Life changes: “The world changes; the world shifts. Things I thought I could do 10 years ago, I can’t do now and things I thought I couldn’t do 10 years ago, maybe I can do now,” Mendenhall said, highlighting how circumstances can change unexpectedly.
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Collateral options: “What kind of collateral is there? What kind of way can you make sure that you’re gonna get paid back or at least some portion or version of it no matter what?”
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This article originally appeared on GOBankingRates.com: I’m a Financial Expert: 4 Hidden Advantages of Personal Loans
