Personal loans can be used for almost anything. In some cases, a lender may ask what you plan to do with the money, and in other circumstances, they will just want to know that you can pay the loan back. Although personal loans aren’t inexpensive, they can be a feasible option for a variety of circumstances. Read on to learn if a personal loan is right for you.
How a Personal Loan Works
Certain loans are designed for a specific purpose. For instance, you can buy a home with a mortgage, purchase a vehicle with a car loan, and pay for university with a student loan. A mortgage uses your house as collateral, and an auto loan uses the car you’re buying as collateral. With personal loans, however, there is no collateral. This means it’s an unsecured loan. Unsecured loans are a greater risk for the lender, and you will likely have a higher interest rate as a result. Your exact interest rate will depend on a variety of factors, such as your credit score and your debt-to-income ratio.
You can take out personal loans as online loans through an online lender or through a more traditional lender like a bank.
When Do You Need A Personal Loan?
When thinking about whether to take out a personal loan, you should consider whether there are less expensive ways for you to borrow. A few reasons for taking out a personal loan include:
- Not having and being unable to qualify for a low-interest credit card.
- You don’t have enough credit on your credit cards to meet your borrowing needs.
- A personal loan is the least expensive of your borrowing options.
- You don’t have any collateral to offer.
You might take out a personal loan if you need to borrow money for only a short and well-defined period of time. In general, personal loans run from 12 to 60 months. Therefore, you could use a personal loan to tide you over while you wait for some cash to come in.
Ways You Can Use A Personal Loan
- Consolidating Debt
If you owe a substantial amount of money, you may save money on interest and late fees by using a personal loan to pay off your debt.
- Paying Off A High-Interest Debt
Some loans, like payday loans, have a high-interest rate. If you can get a personal loan at a lower interest rate, it might benefit you to use this loan to pay off your high-interest debt.
- Financing A Big Purchase or Home Improvement Project
When you’re looking to buy a big purchase, you can put it on a credit card, or sellers will often offer you financing. However, it may be less expensive to take out a personal loan. It all depends on the financing options available. You might also use a personal loan to finance a renovation project for your home.
- Financing a Major Life Event
There are certain cultural and religious milestones that people like to celebrate, but that can also cost a pretty penny. These include celebrations like Bar Mitzvahs, anniversary parties, and weddings. For these occasions, it might be worthwhile to take out a personal loan.
- Improving Your Credit Score
If you take out a personal loan and pay it back in a timely manner, this may help improve your credit score, especially if you have a history of missed payments on other debts. Furthermore, if your credit reports show mainly credit card debt, adding a personal loan may help your “credit mix.” This is because having different types of loans, and demonstrating that you can handle them responsibly, is considered a benefit to your score.
As an unsecured loan, personal loans have a higher interest rate. Therefore, it’s only a good idea to take out a personal loan when you have no other options. For example, if you have nothing to use as collateral. That being said, personal loans are suitable for a variety of different expenses. This is because, unlike with a mortgage, car, or student loan, you can use a personal loan for whatever you want. It can be used to fund a party or to consolidate your debt. The sky’s the limit. Therefore, in conclusion, a personal loan is a good idea when you have no other loan options, or you want the freedom to use the loan however you choose.