Personal loans can provide many advantages to your finances, often in ways that you might not expect. These types of loans could be used as a means to help pay off other bills, reduce debt, and could even help to improve your credit score.
This article covers what personal loans are, their advantages, and what you can use them for. A personal loan may be just the thing that you’ve needed to help improve your finances!
What Is a Personal Loan?
Most personal loans are unsecured, which means you are not required to put up any type of collateral to get the loan. Personal loans are typically provided by banks, credit unions, and online lenders.
If you are approved for a personal loan, you will need to pay it back in fixed monthly payments over the course of the loan’s life. The length of the loan can vary but will oftentimes be somewhere between two and seven years.
These loans are based on the creditworthiness of the borrower. Someone who has good credit might be able to get a low-interest personal loan. However, if you have problematic credit, you will likely find that the interest rates are higher.
In some cases, for those with bad credit, it can be difficult to get a loan at all. If you can get a personal loan with poor credit, you can expect that the interest rate will be quite high.
When to Use a Personal Loan
One of the nice things about personal loans is that you could technically use them for anything that you might need. They aren’t restricted like auto loans or mortgages, for example.
However, even though you can use personal loans for anything you might need, you should still use them wisely. If you have unexpected expenses that pop up, it’s generally better to use money from your savings or emergency funds if you have it. Here are some examples of what a personal loan can be used for.
1. Debt Consolidation
One of the most popular reasons to opt for a personal loan is for debt consolidation. You can use the money that you get from the loan to pay off other loans and all of your credit cards. This allows you to combine all of those balances into one payment. This will often make it easier to pay since you will just have to make a single payment each month.
If you have a lower interest rate on the personal loan than on your credit cards, it could potentially save hundreds or even thousands of dollars in interest. If you have some high-interest debt sources, a personal loan could be a great option to consider.
2. Pay For Moving Expenses
One of the other ways that you might want to use a personal loan is for a move. Moves can cost thousands of dollars, especially when you are moving a long distance. You might not have enough money to cover the costs of transporting items, getting new furniture, and paying your first and last month’s rent in a new place. Having a personal loan can help to make those expenses easier to handle if you can’t afford them all at once.
3. Buying New Appliances and Equipment
New appliances can be expensive. Whether you are moving, or your current appliances are simply old and not functioning properly, it might be time to buy some new ones.
The cost of large household appliances can be quite high. The same is true if you have a computer you use for work at home that stops functioning. Sometimes, getting a personal loan is the perfect way to cover these types of expenses if you don’t have enough in your savings to handle them.
4. Financing a Vehicle
Why wouldn’t you simply get an auto loan for your vehicle? In some cases, you might find it more difficult to get an auto loan with a good interest rate.
Other times, you might want to buy a vehicle outright with a personal loan. This is particularly true with used vehicles being sold by the owner rather than through a dealership. This way, you wouldn’t have to dip into your savings to get the vehicle.
5. Pay for Wedding Expenses
Weddings can be costly, and if you haven’t been saving for your wedding day, you may not have enough money to cover all of the expenses. Having a personal loan can be a fantastic way to get the money needed to cover some of those big-ticket expenses, such as the venue, wedding dress, ring, etc. It could also be used for some of the smaller expenses if you wish.
Because the interest rates for personal loans tend to be lower than credit cards, it’s often a better solution than putting everything on plastic. You can finance the wedding and pay it off later without exorbitant interest rates.
Benefits of Having a Personal Loan
Getting a personal loan can provide a range of benefits to your credit score. When you are trying to build or rebuild your credit, having a personal loan can help with this, as long as you are making your payments on time. Having a personal loan that you are paying can help you to build a strong credit history, which will make it easier to get loans at even better rates in the future.
Having a personal loan can also add to your credit mix, which accounts for 10% of your overall FICO credit score. If you already have some revolving debt, such as credit cards, adding installment debt like personal loans can be a huge benefit. Having both revolving and installment debt will help you to raise your credit score.
You will also find that personal loans will often have a lower interest rate when compared with credit cards. Therefore, using a personal loan to pay some of the larger expenses you have in your life could end up being cheaper for you in the long run.
How Hard Is It to Qualify for a Personal Loan?
The answer is that it will depend on the lender and your financial wellbeing. The lenders will look at your credit score, credit history, debt-to-income ratio, and your free cash flow when they are making a decision.
The better you rank in those areas the easier it will be to get a loan. That’s not to say that you can’t get a personal loan with less than stellar credit, but it will just be more difficult and you may not get the most favorable loan terms. If you find that you aren’t able to get an unsecured personal loan, you may be able to get a secured loan or use a cosigner. Secured loans are those that have some type of collateral, such as your car or your home.
If you do not pay the loan, the lender can repossess the collateral you used. If you opt for a cosigner, they will also be on the loan paperwork. People often choose a family member that has good credit to help them get this type of personal loan. However, you have to remember that if you aren’t making the payments, your cosigner will still be on the hook for them. This can put you in an awkward position if you miss payments.
Personal Loans vs. Other Loans
You may be wondering whether getting a personal loan is the right decision, and you might be considering another type of loan. However, other loan options are not always the better choice and could be more of a problem than they are worth. Here are a few comparisons.
Personal Loans vs. Car Title Loans
Car title loans tend to be fast and relatively easy to get as long as you have a vehicle. However, you are putting your car up as collateral with these loans. If you aren’t able to pay back the loan on time, the lender will repossess your vehicle and sell it, keeping the profit.
To avoid this, a personal loan would be a much better option. It may be more difficult to qualify for this type of loan and getting the funds could take longer. However, you will not have to worry about losing something as important as your vehicle.
Personal Loans vs. Home Equity Loans
Home equity loans are popular for those who may need to have a lot of money in a relatively short period of time. They can work well as a means to make improvements to the home, but they are not always the best solution.
In some cases, it may be better to opt for a personal loan. If you have a smaller expense and you don’t want to risk your house, getting a personal loan is a better choice. The same is true if you do not have a lot of equity in your home. Without a lot of equity, you might not even qualify for a home equity loan.
Personal Loans vs. Payday Loans
Sometimes, people who find that they need some extra money over the course of a month will consider getting a payday loan since it’s a short-term loan. However, these are also short-term fixes for what may be long-term problems that happen month after month. Payday loans also have extremely high interest rates, which can make them a bad financial decision.
Personal loans are definitely a better option when comparing them to payday loans. Personal loans can also be much larger than payday loans. Since you can use them to consolidate your debt, as mentioned above, it also means that you could take care of any of the nagging financial problems that are causing issues month after month.
Personal Loans vs. Small Business Loans
Small business loans to start or fund your business are often one of the first types of loans that business owners consider. However, as helpful as they can be, they may not always be the right solution. Sometimes, it can be better to opt for a personal loan.
Remember, personal loans can be used for anything, including your business. Additionally, it’s often easier to get approval for a personal loan, particularly if your business is new. The funding tends to be faster with personal loans as well, and when you opt for unsecured loans, there is no need to put up any collateral.
Takeaway
When you are getting a personal loan or any type of loan for that matter, you should always proceed with caution. You need to be sure you are working with a reputable lender that can provide you with a good loan and a fair interest rate based on your financial history. You also need to be sure that you have the means to pay back the loan on time each month. Failure to make the payments could cause your credit score to plummet.
All in all, personal loans can be a great way of obtaining money for many different things in your life. Remember to be realistic with your finances and pick a loan that you are confident you can pay back on time, every time.
