You can use a personal loan for a lot of things. Some providers may ask how you plan to use the funds, but most want only to ensure that you afford to pay the loan back. Personal loans are expensive and a viable solution in a couple of instances. This article helps you determine if applying for one is the right solution for you.
How does a personal loan work?
Some loans are designed to serve specific purposes. You can use them to buy a house with a mortgage, a car with an auto loan, or pay for other expenses. In some cases, the property you purchase serves as the collateral. However, personal loans require no collateral because you don’t use a property the lender can seize in case you cannot pay the loan. The provider is taking a risk and charges a higher interest rate than if you’d get a loan with collateral. The extent of the interest depends on the lender and several factors like the credit score.
When should you apply for a personal loan?
Before getting a personal loan, you need to determine if there are other less expensive ways to borrow the money you need. However, there are some acceptable reasons to apply for one.
– You don’t have a collateral
– The personal loan is the least expensive financing solution
– The credit card doesn’t cover your expenses
– You don’t qualify for a low-interest credit card.
You can also consider a personal loan if you have to borrow for a short period.
Let’s further discuss the acceptable circumstances for getting a personal loan.
You need to consolidate your credit card debt
Supposing you owe a substantial sum on one or multiple credit cards with high interest, you can get a personal loan to pay them off and save money in the long run. Before doing it, compare the interest rate on your credit cards and the personal loan. The difference should allow you to cover the debt and pay less in interest. It’s easier to keep track of your debt when you have an obligation with a single lender.
When the difference between the interest rates it’s not big enough, you can explore other financing solutions. For instance, you can transfer the balances to a credit card with a lower interest rate. It’s always smart to discuss with the credit card provider to see if they can provide you an effective solution. If you can’t reach an agreement, it’s time to turn to the online for help. A simple search online can reveal the best personal loans Canada or the country you are residing in has to offer, for example. Do your research, compare options, and choose the one with the lowest interest rate.
You need funds for a big purchase or house repairs
If you want to insulate the house, install a new furnace, change the kitchen appliances, or make another significant improvement to your home, getting a personal loan is more affordable than financing the purchases through the seller or putting the expenses on the credit card. Home improvements are essential but also expensive, and it’s best to pick the financing solution that puts less strain on your budget.
You need to pay off other high-interest debt
Even if the personal loan is usually more expensive than a loan with collateral, it’s not the most expensive type of loan available on the market. Let’s say you have a payday loan that carries a higher interest rate than the personal loan you get from an online provider; then applying for a personal loan is a great way to pay it off and save money. Also, you may have a personal loan with a higher interest rate than the offers available on the market now, and getting a new one is a wiser financial decision than continuing to pay the existing one. A personal loan is a great solution to save money when it allows you to replace a high-interest debt with a smaller-interest one. Before applying for the new personal loan, check with the first lender if there are any prepayment penalties you must cover. Take into consideration this expense when you calculate how much you could save if you replace the old loan with a new one.
You need money to pay for a major life event
Major life events that require celebration can be quite expensive. As with any other significant purchase, a destination wedding, anniversary party, or bat mitzvah can cost a lot, and you may need extra cash to cover the expenses. A personal loan is a financing method you can use when you need money to pay for a major life event. However, even if these events are important, you need to think if it wouldn’t be better to scale down the celebrations than applying for a loan. Get the personal loan only if you cannot cover the essential expenses associated with the event. Don’t get extra cash to organize an opulent event.
Also, financial experts state that it’s not a wise financial decision to borrow money to fund a vacation if it’s not a trip of a lifetime.
You need to improve your credit score
Did you know that getting a personal loan and paying it off in time can boost your credit score? It’s a helpful trick if you have other debts or a history of missed payments because it proves to lenders that you’re a responsible borrower now. Also, if you have only credit or debit cards, getting a personal loan can mix your credit history. Financial organizations see credit mix as a sign of financial responsibility because they see that you can handle various types of loans.
However, borrowing money you don’t need with the sole purpose of improving your credit score isn’t a wise decision. If you want to build a great credit score, you should pay your bills on time and minimize the credit utilization ratio.
Getting a personal loan can help you in various instances. It’s is a great solution when you need a quick influx of cash to pay for one of the above expenses. But remember, most personal loans are not cheap and always come together with an interest rate. If you can find a more affordable alternative, you should always choose it.