Generally, a personal loan is a high-interest loan that ends up costing you quite a bit of money. But sometimes a personal loan is the right choice for the right person.

For example, if you have $1,000-$5,000 in credit card debt, a personal loan used as a debt consolidation loan is a good idea. Most credit cards are higher interest rates, and they're all revolving lines of credit with compounding interest. That means that each month, you'll be paying interest on top of interest, and the majority of your minimum payment goes towards interest. A personal loan would be an installment loan. It works just like a mortgage or an auto loan. You might get a 3-year term, and from the beginning, the amount of interest you pay is calculated into your payments.

Even better than consolidating your bills into one payment is the fact that it helps your credit score. The loan will show up on your credit report as an installment loan (like a mortgage) instead of a revolving loan (like a credit card). Creditors would rather see installment loans than revolving lines of credit, so that helps your credit score.

When looking for a personal loan, don't get wrapped up in interest rates too much. Even if your credit card is at 13% and the personal loan would be at 15%, you'll end up spending less in interest on the personal loan, because you won't have compounding interest on a personal loan. But if you 6% credit cards and the personal loan would be at 15%, it might be wiser for you to pay extra on your credit card payments to make up for the compounding interest.

Overall, a personal loan has many benefits. Just make sure you look into the terms and conditions of the loan before you sign on the dotted line!

Learn more about this author, Barry Tadmore.
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