6 good reasons to get a personal loan – Forbes Advisor
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Personal loans come in handy for a variety of purposes, from consolidating debt to pooling what your family has always dreamed of. But they’re personal, which means your reasons are yours.
If you are considering getting a personal loan, learn how they work before you apply.
How Personal Loans Work vs. Other funding
Personal loans are generally a type of unsecured loan, which means that you are not required to offer collateral in case you fail to repay the loan. There’s nothing for a creditor to grab if you take out an unsecured loan and don’t pay it back, but there are still consequences: your credit rating will drop and your loan could default. Secured loans, on the other hand, require collateral, such as your house in the case of a mortgage or your car in the case of a car loan. If you don’t pay off your secured loan, the lender could foreclose on your property.
Unsecured loans use your credit score and your credit history to determine if you qualify. While home and auto loans require you to use these loans for specific purposes, personal loans do not have the same requirements. Instead, you can use a personal loan for almost anything, as long as it meets the conditions outlined in your loan agreement.
Personal loans are given in a lump sum, and you make monthly payments until your loan is paid off in full. This is different from credit cards, which are a type of revolving credit. Credit cards are used as needed up to a certain amount, or your line of credit. As long as you make monthly payments, you can keep spending whatever you want up to your limit.
6 reasons for a personal loan
Personal loans can be used for virtually all of your needs, within reason and under the terms of your loan. You cannot use the money for anything illegal, for gambling, or in most cases for post-secondary education expenses. Here are some good reasons to get a personal loan.
Emergency cash assistance
If you need the cash right away to cover bills, an emergency cost, or something else that needs immediate attention, you can take out a personal loan. Most lenders have online apps that let you know if you’ve been approved within minutes. You may receive financing that day or within a few business days, depending on your lender. You can use a personal loan to cover emergencies such as:
- Payment of overdue home payments and utilities
- Medical bills
- Funeral expenses
- Unexpected auto repair
The personal loan is a good alternative to the personal loan. Payday loans are short term, high interest loans that usually have to be paid off when you get your next paycheck. You usually won’t have to go through a credit check, and you can get financing right away. But payday loans could do more harm than good. Interest rates can approach as high as 400%, and many borrowers do not have the funds to pay off the loan in full as quickly as payday loans require.
Americans owe $ 1,000 billion in credit card debt. While part of this includes purchases made by people, it also includes interest and fees. It all adds up and can prevent many consumers from paying off their credit card debt.
A personal loan can be used as a form of debt consolidation, especially with credit card debt. This is also a common reason people take out a personal loan. Personal loans charge lower interest rates than credit cards, especially if you have good credit. The best personal loans charge an interest rate as low as 4%, well below the double-digit percentages that most credit cards charge. You can take out a personal loan, pay off your outstanding credit card balances, and then make a single payment with your new personal loan manager.
Home improvement and repairs
If you own your home, you can take out a home equity loan to repair or make improvements. But you can also take out a personal loan. Home equity loans and lines of credit are great for tackling real estate projects, but they’re secured and use your home as collateral. Additionally, keep in mind that some lenders have tightened HELOC loan requirements due to Covid-19.
If you don’t want to risk losing your home due to late payment, a personal loan is a solid substitute. Along with this, it might be faster to get a personal loan compared to a home equity loan.
If you are moving close to where you currently live, you may not need to cover significant expenses. But if you are moving out of state, you may need extra money to pay for moving expenses. Moving away means covering the costs of packing your belongings, possibly hiring movers and transporting your belongings to your new location.
A personal loan can also help finance the process of finding a new home. For example, if you find an apartment, you may need to cover expenses for the first month, last month, and a security deposit. You may also need a little extra money to furnish your new home.
Auto loans are available if you are looking to buy or lease a car, but personal loans are also available. Auto loans tend to have lower interest rates than personal loans, but they are secured loans and use your vehicle as collateral. If you’re worried about missed payments and your car being repossessed, a personal loan might be a better option for you.
We do not recommend borrowing money to pay for a wedding. Instead, consider reducing your wants to fit your budget, rather than increasing your budget to meet your needs.
But if you need to borrow money, you have a few options, like credit cards and personal loans. Credit cards tend to have higher interest rates than personal loans. Making a cash advance on your credit card can result in even higher interest rates and fees. A personal loan is a cheaper option to borrow if you need money to cover the costs of a wedding.
Reasons to avoid a personal loan
While personal loans can be a saving grace in times of great need, in some cases you should avoid borrowing money. Consider avoiding a personal loan if:
- You can’t afford it. Borrowing short-term money is one thing, but remember that you will still have to pay it back. If you can’t afford the monthly payments on your new personal loan, consider skipping it.
- You don’t need it. If you’re taking out a personal loan to cover the cost of your vacation or something you don’t need right away, consider putting it off until you have more cash on hand.
- There are better options available. For home renovations and repairs, a home equity loan or line of credit might be a better choice. For cars or other vehicles, you can save money with an auto loan.
Before taking out a personal loan, first assess all of your options. Borrowing money doesn’t have to be done on a whim. Instead, take a look at your financial situation to see if a personal loan is the right choice for you.