The Top 9 reasons for personal loans
Personal loans are sums of money obtained for many reasons, including major purchases, debt consolidation, unanticipated bills, and more. Over the period of a few months to several years, these loans are repaid in monthly instalments. It can take longer depending on your situation and how persistent you are about making payments.
In some circumstances, you might wish to try an alternative strategy before applying for a personal loan, like making a minor purchase or haggling for a lower price or fee.
How do personal loans work?
When your application for a personal loan is granted, a lump sum payment will be made into your bank account. Depending on the lender, the transfer could happen in as short as 24 hours or could take a few weeks. As soon as the loan is disbursed, it would help if you began making monthly instalments.
Most personal loans have a fixed rate of interest, so your monthly payments will remain the same. Most personal loans are unsecured, which means no security is put up as security for the loan. If you can’t get authorised for an unsecured personal loan, you might need to put up collateral, like a savings account or certificate of deposit, to get approved. To increase your chances of approval for a personal loan, you can invite a friend or member of your family to co-sign.
Whatever your lending objective, you probably have a variety of possibilities. There are several financing options, including credit cards and home equity loans. Personal loans are the best option for customers. These loans are often less expensive than credit cards, and funding is faster than home equity loans.
These loans are less hazardous than secured loans like home equity products because it has no collateral attached, meaning that if you default, your home, car, or savings account won’t be immediately in danger.
How to tell if a personal loan is right for you or not?
A personal loan might be wise if you need an immediate infusion of cash to cover urgent costs. They mainly have cheaper interest rates than credit cards if you have a high credit score.
Of course, you should consider both the pros and cons. After all, getting a personal loan entails incurring debt, and you must be ready to continue making payments on that debt for several years. If you don’t have the money set aside each month for principal + interest payments, you should reevaluate how much you need to borrow or how it should be done.
How to get a personal loan
To discover the best interest rate on a personal loan, compare offers from many lenders. Apply first to your existing bank, then to other banks, local credit unions, and online lenders. Before applying, most lenders will let you become prequalified so you may examine your possible interest rates and terms without having a hard query on your credit record. It would help if you contrasted loan conditions and costs in addition to interest rates.
Once you have found a preferred lender, you will submit a complete application with your loan information, personal information, and income verification documents. Your credit report will be hard examined as a result of this. Most lenders consider this stage of the process to be rapid; if you provide the necessary paperwork, you might be able to receive your funds within a few days.
The pros and cons of personal loans
In comparison to many other types of loans, personal loans can have advantages. Here are a few benefits of choosing this kind of financing over others.
One lump sum
Making a big purchase, consolidating debt, or using the loan in other ways all at once may be easier because you receive your loan payment all at once.
Fast funding times
Personal loans are beneficial for emergencies or when you need money immediately because they have short approval and payback times. Some lenders for these loans might transfer the funds as quickly as the following working day.
No collateral requirement
You can get authorised for unsecured personal loans without putting up any collateral. This means that you are not needed to pledge your house, car, or other items as collateral for your promise to repay the loan. There will be severe financial repercussions if you cannot repay the loan per the terms set forth by your lender. But you won’t necessarily lose your house or your automobile as a result.
Lower interest rates and higher borrowing limits
Compared to credit cards, personal loans frequently have cheaper interest rates. Compared to credit card rates, these loans have an average interest rate of 10.28 per cent as of July 2022. Consumers with good credit history can qualify for personal loan rates in the range of 10.3 per cent to 12.5 per cent. Additionally, you can be eligible for a loan with a larger loan amount than the credit card limit.
Flexibility and versatility
Only specified uses are allowed for certain loan kinds. Like, if you take out a car loan, the only thing you can do with the money is buying a car. Personal loans can be used for many things, like debt consolidation and paying for medical expenses.
This type of loan can be a suitable option if you want to finance a major purchase but do not want to be restricted in how you utilise the funds. Before applying, ask your lender what purposes are permitted for the loan.
Personal loans can have terms of 2 to 10 years, depending on the lender, in contrast to short-term loans like payday loans and others with extremely high-interest rates. This helps you to have more affordable interest rates and smaller monthly payments.
Easier to manage
Consolidating debt from many credit card accounts is one reason why some people take out personal loans. Compared to many credit cards with varying interest rates, due payment dates, and other factors, a personal loan with a single fixed-rate monthly payment is easier to handle.
If they are approved, borrowers can simplify their monthly payments and save money by switching to a personal loan with an interest rate lower than their credit cards.
Personal loans are not always the best option, but they can benefit some people. Before applying for this loan, think about these drawbacks.
Interest rates can be higher than alternatives
Personal loans do not necessarily have the lowest rate of interest. This is mainly true for credit-challenged customers, who may end up paying greater interest rates than they would with credit cards.
More eligibility requirements
More stringent criteria may apply to personal loans than other funding forms. Fewer lenders will be willing to work with you if you have bad credit or brief financial history.
Fees and penalties can be high
Fees and penalties that may be associated with personal loans could raise the cost of borrowing. Origination fees for some loans range from 1 per cent to 6 per cent of the loan amount. The processing fees, which go toward the loan, can either be added to the loan or deducted from the amount given to the borrower.
Some lenders may impose prepayment penalties if you pay the remaining debt before the end of your loan term. Review all the costs and penalties associated with any personal loans you are considering before applying.
A personal loan needs you to make an extra monthly payment. Not being attentive could lead to issues paying other important bills or your daily living expenditures.
Personal loans can be used to combine debts, like credit card amounts, but they do not deal with the issues that led to the debt. The available credit limit is increased when you use this loan to pay off your credit cards. This allows spenders to rack up extra charges rather than pay off debt.
Higher payments than credit cards
Credit cards typically have low minimum monthly payments and no requirement to pay off the entire balance by the due date. The set monthly payment for personal loans is better and must be repaid in whole by the loan’s due date.
You must get used to the increased payments and the loan payoff schedule if you want to consolidate your credit card debt into a personal loan; otherwise, you risk defaulting.
9 reasons to get a personal loan
1. Debt consolidation
Debt reduction is one of the most popular justifications for taking out a personal loan. You combine all of your outstanding loans and credit card balances into one monthly payment when you apply for a loan and use it to pay off several other loans or credit cards. It is easier to determine a time frame for paying off your bills without being overwhelmed when your debt is grouped together.
The lower interest rates are some of the main benefits of these loans to pay off your credit cards. With lower rates, you can shorten the time it takes to pay off the debt and the amount of interest you have to pay.
Best for: Those with a lot of debt at high-interest rates.
Takeaway: You can combine several payments into one with a lower interest rate by using this type of loan to pay off high-interest debt, like credit card debt.
2. Alternative to payday loan
A personal loan could help you avoid paying so much in interest if you need money for an emergency.
These loans typically have longer terms and substantially lower total interest costs for the borrower.
Best for: Those with poor credit who want to stay away from predatory loans with excessive interest rates.
Takeaway: These loans are more affordable and secure than payday loans.
3. Home remodelling
Homeowners can use a personal loan to improve their property or finish critical maintenance tasks like plumbing or electrical wiring replacement.
Individuals who don’t have equity in their homes or who don’t want to obtain a home equity loan or line of credit might consider personal loans. Since this type of loan is frequently unsecured, you often do not need to use your property as collateral, unlike home equity products.
Best for: People who want to fund a small to mid-sized home remodelling or improvement project.
Takeaway: If you don’t have equity in your house and don’t want to take out a secured loan, a personal loan can help you finance a home renovation project.
4. Moving costs
Money from a personal loan can be used to transfer your stuff from one place to another, buy new furniture, ship your car across the country, and pay for any supplemental costs. If you are relocating somewhere without a job, using this loan for moving expenses can also help you stay afloat. By doing this, you’ll be able to keep your emergency fund and savings intact.
Best for: Long-distance moves or people who want to spend thousands of dollars.
Takeaway: The key point is that a personal loan can assist you in paying for long-distance moving expenditures if you cannot do so right away.
5. Emergency expenses
Taking out a personal loan could be a cheap solution if you need money for an immediate need, such as paying for a loved one’s burial.
Another frequent justification for getting a personal loan is unexpected medical expenses, mainly if your doctor demands full payment. After bargaining with the hospital, doctor, and insurance provider, you might require a personal loan to pay for unforeseen medical expenses.
Best for: People who require emergency or unforeseen finances.
Takeaway: These loans are a wonderful option to pay for an emergency or unforeseen need because they may be disbursed so rapidly.
6. Large purchases
A personal loan can help if you unexpectedly need to replace your vehicle’s transmission or buy a new washer and dryer but do not have the money on hand.
Especially if you require those items frequently, personal loans let you pay for expensive auto repairs or make immediate purchases of large household goods and devices. This loan can save you time and money in the long run by avoiding using laundromats and other expensive, short-term options, even if you’ll have to pay interest and possibly upfront costs.
Best for: Those who want to buy a larger piece of furniture for their home now to save time and money later.
Takeaway: A personal loan can enable you to purchase new equipment quickly.
7. Vehicle financing
One way to pay for a car, boat, RV, or even a private jet is with a personal loan. If you’re not purchasing the car directly from the manufacturer, there’s also one option to pay for it.
A personal loan, for instance, will enable you to buy a used car from another customer without depleting all of your funds.
Best for: Those who don’t want to use the vehicle as security for an auto loan and those who want to buy a new car.
Takeaway: When paying higher bills, taking out a personal loan is preferable to use all of your savings or emergency reserves.
8. Wedding expenses
Large-ticket goods like the location and the bride’s gown, as well as more modest costs like flowers, photography, the cake, and a wedding organiser, can all be paid for with a wedding loan. Like taking out a personal loan to help plan your engagement and wedding as you’ve always imagined if you don’t want to spend all of your cash.
Best for: those seeking financing for wedding costs.
Takeaway: You can avoid using your savings or emergency fund by financing your wedding expenses in advance with a personal loan.
9. Vacation costs
A luxury cruise or a honeymoon could cost more than the typical vacation, but is a personal loan necessary? Whether you’re celebrating an anniversary or recent graduation, personal loans might help you pay for your ideal holiday. Remember that even when your vacation is finished, you will still pay interest on that loan.
Best for: Travelers who can afford to spend a lot of money.
Takeaway: A personal loan may be able to let you travel to your chosen location if you’re willing to spread out the cost of your trip over several years.
When not to use a personal loan
A personal loan can help cover greater or unforeseen epenses, but there are some circumstances where it might not be the best choice:
- Your credit score is on the lower end. Your interest rate could be greater the lower your credit score is. Search for bad credit loans, which are available to borrowers with less-than-perfect credit scores, if you have bad credit.
- You can’t afford the monthly loan payments. Evaluate your spending strategy to calculate how much you can afford to pay as interest on a loan. According to Lauren Anastasio, CFP at SoFi, if you have a restricted monthly budget, a personal loan is not the best option.
- You can qualify for better financing options. According to Anastasio, a personal loan might not make sense if it is utilised for a purchase that is eligible for a different kind of loan. “This would apply to the automotive, education, and real estate industries. These loans—mortgages, auto loans, and student loans—are intended explicitly to cover a particular expense, and each has features and advantages that personal loans do not. Consider whether you would be better off with a loan created especially for that purpose or why you are applying for a personal loan.
- The expense isn’t necessary. While obtaining a personal loan is a personal choice, borrowing money for an unnecessary expense can jeopardise your financial stability.
In the end, you should exercise caution while taking out a personal loan. If you don’t want to jeopardise your future financial security, you should only utilise it to pay for urgent requirements.
A personal loan can ultimately be used for nearly anything, which is why it is referred to as “personal”.
Always remember that the loan will eventually need to be repaid, regardless of the situation. You are borrowing money that must be repaid-with interest when you take out a personal loan to pay off credit cards or plan the ideal wedding. These loans are a terrific way to pay for big purchases and consolidate debt, but you should always use them wisely.
edited and proofread by nikita sharma