What is a good reason to take out a personal loan?
A personal loan is money that is borrowed to finance personal expenditures. This can be things such as large purchases, debt consolidation, emergency repairs, and more. In general, these loans are paid back in monthly installments over a specified term, usually two to six years. However, it can take longer depending on your particular circumstances and how diligent you are about making payments.
How a Personal Loan Works
Once you get approved for a personal loan, the funds will be deposited in a lump sum into your bank account. This transfer can take as little as 24 hours to as long as a few weeks, depending on the lender. As soon as the loan is given to you, you’ll need to start making monthly repayments.
In general, personal loans have fixed interest rates, which means that your payments will be the same every month. Also, personal loans are usually unsecured. This means that there’s no collateral behind the loan. Consequently, if you don’t qualify for an unsecured personal loan, you may have to use collateral, such as a savings account or certificate of deposit, to get approved. Alternatively, you may be able to use a friend or family member as a co-signer on your loan, which can help get you approved.
When looking for a personal loan, the best way to get started is to compare online loans. You may also want to compare interest rates between different lenders like banks, credit unions, and online lenders.
Six Reasons to Take Out a Personal Loan
It’s essential to carefully consider your financial situation before taking on any type of loan. Here are six good reasons for taking out a personal loan:
- Debt Consolidation
A common reason for taking out a personal loan is to consolidate debt. Debt consolidation involves using a loan to pay off the balance of multiple loans or credit cards, thereby combining your outstanding balances into one monthly payment. As a result, it’s easier for you to work out a time frame to pay off your balances without feeling overwhelmed.
The main benefit of using a personal loan to pay off your debts is the lower interest rates. With lower interest rates, you can decrease the amount of interest you’re paying and the amount of time it will take you to pay off the debt.
- Home Renovations
If you need to upgrade your home or complete necessary repairs such as fixing the plumbing or redoing the electrical wiring, you can use a personal loan.
A personal loan is ideal for people who don’t have any equity in their home or prefer not to get a home equity line of credit or a home equity loan. The advantage of a personal loan over home equity products is that you’re not using your home as collateral, so they’re less risky.
- To Pay for Moving Costs
Moving is expensive. Moving.com states that moving costs $1250 for local moves on average, and long-distance moves can cost around $4890. If you don’t have this kind of money on hand, you can use a personal loan to finance your moving expenses.
- Purchasing Appliances
Sometimes appliances break down unexpectedly. Therefore, if you suddenly find yourself in need of a new washer and dryer or a new stove and don’t have the money on hand, a personal loan can help. You can also finance luxury purchases like an entertainment center or gaming computer with a personal loan.
- Paying for your Wedding
Weddings are one of the most expensive things you’ll finance in your life. In fact, TheKnot.com states that the average cost of a wedding in 2019 was $28,000. If you don’t have this kind of cash readily available, then a personal loan will help you cover your costs.
- As an Alternative to a Payday Loan
Payday loans charge some of the highest interest rates in the lending industry. Therefore, if you need money for an emergency, taking out a personal loan instead of a payday loan may say you hundreds in interest charges. Additionally, payday loans have short repayment terms, usually two to four weeks. This fast turnaround time can make it hard for borrowers to repay the loan by the due date. Consequently, many borrowers have to renew the loan, which causes the accrued interest to be added to the principal, increasing the total interest owed.
If you require a quick influx of cash to pay for necessary expenses, then a personal loan is a good option. In general, you will get a lower interest rate with a personal loan than a credit card, especially when you have a good credit score. However, you should always weigh the benefits with the drawbacks. When you take on a personal loan, it means taking on debt, and you have to be ready to make payments on that debt for a few years. If you don’t have the monthly budget to make principal payments plus interest, then you should reconsider the amount you have to borrow or the way that you borrow.