When I first decided to freelance, I was pretty broke. I had an ancient desktop computer that was slow and struggled to connect to the Internet, and I was using a rickety, folding card table as a desk. It wasn’t the most productive environment, and it certainly affected my output.
To take my freelancing to the next level, I knew I needed to upgrade my workspace and equipment, but my funds were limited. That’s where a personal loan came in. It helped me get the tools I needed at a much lower interest rate than if I had used a credit card.
My experience isn’t unique; many new freelancers and business owners go through the same thing. They have trouble getting the money they need because they’re so new. According to the Federal Reserve Bank of New York’s Small Business Credit Survey, nearly 60 percent of new businesses reported challenges getting money, limiting their ability to grow.
If you’re entering the world of freelancing and are in need of capital, here’s how a personal loan could help.
What are personal loans?
With personal loans, you work with a bank or another type financial services company like an online lender to borrow the money you need. Unlike some other forms of debt, personal loans are usually unsecured. That means you don’t have to put up an asset as collateral, so you don’t have to worry about risking your car or other valuable.
When you take out a personal loan, you take out a set amount and repay it over a fixed loan term. You have one monthly payment, and you can circle the loan’s payoff date on a calendar.
If you have good to excellent credit, you can usually get a personal loan with a low interest rate, making it a better option than a credit card in most cases.
In my situation, I needed to borrow about $3,000 to buy a new laptop, printer, desk, and office chair. If I had put that on my credit card, which has a 19% interest rate, I would have had a minimum monthly payment of $75. If I only made the minimum, it would’ve taken me over five years to pay off the debt, and I would repay a total of $4,725; I’d pay over $1,700 just in interest charges.
By contrast, my $3,000 personal loan had a 9% interest rate. I paid it off in three years, and repaid a total of just $3,434. Using a personal loan instead of a credit card saved me over $1,200.
Why a personal loan might be better than a business loan
But what about business loans? Business loans tend to have very low interest rates. However, they are near impossible for freelancers or new business owners to get. Most business loan lenders require you to be in business — and be profitable — for several years before they will approve you for a loan. That’s why personal loans make so much sense for new businesses.
Disadvantages of personal loans
While a personal loan can be a useful tool for new freelancers, there are some downsides to keep in mind.
Most notably, personal loans are a one-time loan. You can use it cover your expenses, but once you spend that money, you can’t get access to more unless you apply for a new loan. If you think you’ll have an ongoing need for a line of credit, a credit card is likely a better choice.
Because personal loans are unsecured, there’s more risk to the lender. If your credit is less-than-stellar, you can expect to pay much higher interest rates; some can be as high as 30%.
How to get a personal loan for your business
You can apply for a personal loan online. Depending on your needs, you can borrow anywhere from $100 to $100,000. You generally need a credit score of at least 580, but the higher your score, the lower the interest rate will be on your loan.
To qualify for a loan, you’ll need to enter your personal information. That includes your name, address, Social Security number, and income. In most cases, you’ll get a decision instantly. Even better, you can get your money within a few days rather than a few weeks.
Financing your goals
If you need help financing your new freelancing business, a personal loan can be a smart option. If you decide that it’s right for you, make sure you compare offers from multiple personal loan lenders to ensure you get the lowest rates.
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