People consider personal loans for all kinds of different reasons. However, only some of those reasons are worth the higher interest rate a personal loan usually carries.
If you want to learn about how a personal loan works, and when might be a good time to get one, this article is for you.
How Do Personal Loans Work?
Some types of loans can only be used for a specific purchase. For instance, a mortgage allows you to buy a home, a student loan helps you pay for college, and a car loan can only be used for an automobile purchase.
When a loan is used for a house or car, that item becomes collateral for the loan. However, personal loans usually don’t have collateral, so the lender can’t necessarily make up the loss if you stop making payments.
Because of that, the lender is taking on more risk, and will probably charge a higher interest rate than a car loan or a mortgage.
The amount of interest charged will depend on several factors, such as your credit score and current savings.
When Should I Get a Personal Loan?
Before taking out a personal loan, you may want to consider if there are other less costly ways to borrow money. Here are some reasons to consider a loan:
- The personal loan is the most reasonable borrowing solution
- You aren’t able to obtain a low-interest credit card
- You cannot offer collateral for the loan
It may also be suitable to get a personal loan if you only need the money you borrow for a short and definite time. The ideal term length for personal loans is usually between 12 to 60 months.
For example, if you know that you’ll be receiving a significant amount of money in the near future, taking a two-year personal loan to cover your cash flow in the meantime may work well.
These are 6 times when a personal loan may be worth considering:
Financing a Home Renovation Or Other Large Purchase
If you want to install a swimming pool, add a solar panel, or renovate your bathroom, a personal loan may be the best choice for those home improvements.
It can especially beneficial for individuals who want to finance minor home projects and upgrades.
While you can often take out a secured loan for home renovations, doing so does mean that your home becomes collateral for the loan.
If you prefer to avoid that, especially when the amount you need isn’t huge, a personal loan may be the best option.
Paying For a Significant Life Event
Celebrating major life occasions can be pretty costly. Just like major purchases, major life events such as weddings, anniversary parties or a bat mitzvah can come with a high price tag.
While these events are important, you should still think about whether it wouldn’t be better to scale back somewhat instead of carrying debt into the future.
Ideally, only take out a personal loan if you cannot afford to cover the crucial expenses for the event, and borrow as small an amount as possible. Don’t take out extra money to organize an extravagant event.
One of the most common (and beneficial) reasons people take out a personal loan is to consolidate debt.
If you’re currently paying for one or several credit cards with high interest, getting a personal loan can help you pay the debt faster and save money.
The best thing about consolidating your debt this way is that it combines everything you owe into a single monthly payment, letting you pay off your debt in a reasonable time frame.
Another benefit is lower interest rates, since they’ll not only help you pay off your debt faster, but will help you pay less interest overall as you do.
Start by consulting with your credit card lender to see if they can give you an appropriate solution. If the process isn’t successful, researching personal loans is the logical next step.
A simple search will reveal the best personal loans in your country. Do your research and calculate the savings depending on different payback times and interest rates.
That way, you can maximize the benefits of your loan.
Paying Medical Bills
While many medical expenses are covered through health care plans and insurance, there are some costly medical treatments that may still carry a price tag.
Generally, people may take out loans for procedures they cannot afford since health insurance doesn’t cover them. Examples may include fertility treatments, dental work, and cosmetic surgery.
But these aren’t the only medical expenses that may have a cost. Prescription medications, aftercare following a medical procedure, and medical travel can all be expensive as well.
A personal loan can be the most effective way to cover any unexpected medical expenses of this variety, since funds are payed out quickly. Just make sure to borrow as little as possible.
Covering Moving Expenses
Generally, people don’t need a personal loan when moving to a new home in the same city or its surrounding area. But making a major move over a long distance is a different story.
The costs involved in moving all your belongings can be significant, and you may need extra funds to get the move done.
A personal loan can help you purchase furniture for a new home, move your belongings, transport your car, and cover any extra expenses involved in the move.
If you’re moving to take advantage of a better job or the chance for a higher income, a personal loan can be a sensible way to cover initial expenses, leaving you to pay back the loan with the help of your extra earnings.
An Alternative to a Payday Loan
Taking out a payday loan can be tempting when facing financial issues. However, even if these loans can help you get by, they are frequently predatory.
Their high interest rates and long repayment terms can make your situation even worse if you’re not careful.
Most people are approved for payday loans quickly, but these loans pose significant risks. If you don’t pay back the money in the required time frame, the lender can increase interest rates by as much as 400%.
Getting a personal loan will involve a little more work to get approved, but the terms are safer, interest rates are lower, and the payback process is much more straightforward.
Personal loans can often be a good way to consolidate debt or make significant purchases. However, researching to determine it’s the best option for you is a must.
It’s essential to make a solid plan for paying back the loan to avoid getting into bigger trouble.
If you do your research, negotiate the lowest possible interest rate, and plan your budget properly, a personal loan can help you reach your goals.