A Personal loan is usually notable for its versatility. The funds can be used for various purposes, from dealing with the past to planning for the future and virtually everything in between.
When you get a personal loan, you complete an application with a bank, credit union, or online lender. If it gets approved, you will be able to borrow a sum of money you pay back over a set time period. You will pay interest — charged at either a fixed or variable rate — and can use the funds for almost anything that you want.
Personal loans are different from other types of loans you take out, such as a mortgage loan or auto loan, which are secured loans. When you borrow for a home or car, the house or vehicle serves as collateral and the lender can seize them if you fail to make payments.
On the other hand, most personal loans are unsecured. The lender has just your promise to pay back which is why potential lenders check your credit score and want proof of income before giving you a personal loan.
How Personal Loans Work
Personal loans are credit products, and many banks, credit unions and online lenders usually offer them. These loans are typically unsecured, which means that you don’t have to provide any collateral. All come with terms, including:
The number of months or years you have to repay the loan completely
The interest rate, which is what the lender charges you to finance the loan
The monthly payment
Some loans come with an origination fee, which might be anywhere between 1% to 8% of the loan amount. The fee for a $5,000 loan, for instance, could range from $50 to $400. The fees will be tacked on to the principal, and interest will be calculated on the total.
When you apply for a personal loan, the lender will check your credit history and credit scores, and analyze your cash flow to decide whether you can handle the payments. If you get approved, the money may be available to you within minutes or days, depending on the lender.
What Can I Use a Personal Loan For?
You can use your loan funds for a variety of things, and some are more financially healthy than others. Among the vast array of options:
If you are charged a high interest rate by your current batch of creditors, a personal loan to consolidate the old debts at a lower rate can work to your advantage, especially if there is no origination fee. However, one caveat: if you consolidate your credit card debt, you can use those accounts again.
Such credit lines may be enticing, but make sure you plan not to use your cards while you’re paying off your loan— otherwise you might be back in the same situation, but with an even higher debt stack.
Despite mounting medical bills, personal loans will help you. However, because these commitments can get very high, try to negotiate the bills first. You may get a discount from your health care provider.
If not, you may not have to borrow money and pay interest in installments at no additional cost. If these methods don’t work, you may need to pay off that debt with a personal loan.
Although with a personal loan you can repay a student loan, it is typically not wise. Interest rates on student loans are usually lower than other loans, so payments on a new loan are likely to be higher.
Additionally, if you pay off your student loan with a personal loan, you can lose the chance to get deferments and forbearances, flexible payment plans, and the ability to have all or some of your debt forgiven.
Collection agency debt
When creditors breathe your hair, it can make sense to fulfill the bad debts with a personal loan. The calls will not only cease, but your credit rating will begin to improve.
The problem? Any interest is charged by many owners, but borrowers do. And if due to the collection operation, your credit rating is poor, the interest rate on your personal loan is likely to be high.
A small business
Personal loans are not intended for business purposes, although some businessmen plan to use the funds for start-up or operating costs.
Small business loans or credit lines are the most suitable options, so first seek advice from a specialist who can direct you to the right choice if you are tempted to increase these funding sources with a personal loan.
It can be frightening and costly because of the IRS. Eliminating the debt with a personal loan is an option, but be sure to find out if there is a better IRS installment agreement first. Compare the interest rate and charges you will incur on your personal loan and interest and penalties when you pay the installment agreement to decide if this is a good idea.
Necessary home repairs
It is fair and prudent to borrow money to fix something important in your home (such as coping with termite damage or a damaged roof). Custom stained glass windows installation? It’s not that much. Do not conflate desire with need. Also, check to see if your homeowners insurance can cover the cost of repair. That’s why you’re paying for it after all.
A wedding can be really expensive. Without savings to pay for that big day, a personal loan might be a great idea. Just check the pros and cons first. The interest rate may be lower than if you used a credit card, and a well-managed loan can boost your credit rating, but you might be tempted to overspend.
Repaying family or friends
If you are indebted to someone who has helped you out with a loan but now you cannot pay them back, your relationship is at risk. A personal loan can rescue but communicate with that person first. Perhaps you can work out new payment arrangements that will be mutually satisfying.
While a personal loan might help you feel less guilt toward someone who has helped you financially, transferring this debt to a personal loan could end up costing you more in the long run.
Helping a loved one
Contrarily, when a destitute friend or family member approaches you for financial help, you may be so moved by their plight to take out a loan to help. If you will assume the costs and can easily meet the payments, that’s your prerogative, but be careful. If you fall behind, you’ll be the one needing assistance.
On the other side, many marriages do not work out the way people hope. The cost of divorce can exceed the money in your bank account. According to a study, the average divorce costs around $15,500. If you do not have enough to cover the lawyers’ fees and court costs, a personal loan can come in handy.
You can pay for a fabulous vacation with a personal loan. But should you? Probably not. Traveling is wonderful, but it is advisable to use a portion of your paycheck or save for the trip instead.
Since car loans are secured by the vehicle, the interest rates tend to be lower than those on unsecured personal loans. So, unless you can score an unusually low rate, an auto loan is probably preferable. The only enticing aspect of using a personal loan is that it does not require a downpayment, and auto loans typically do.
Expensive consumer goods
Computers, mattresses, jewelry, appliances,the list of things you can buy is endless. If you don’t have the cash, the funds from a personal loan can help. To know whether it is wise to go into debt for these, ask yourself if you really need the item now. If you do not, you can start saving for it instead.
Taking out a personal loan for a loved one’s funeral is a personal decision to make, but you should consider your ability to repay the loan before making this decision.
When you get an animal, you’re assuming a serious responsibility. Major veterinary bills could be in your future, and a personal loan can help you pay for them when you’re broke. However, it is not wise to buy a pet with the loan. You should be able to afford the animal, and having to go into debt to acquire a pet is a sign that you cannot.
You can take a personal loan if you want to spread joy, give generous gifts and celebrate the season in style.
The Bottom Line
Personal loans can be very useful especially when used in the right circumstance. For Instance, most people can not afford to pay cash for a home, making a mortgage loan a necessity. Be sure to consult with a trustworthy bank to check and weigh your options.