Top 5 Reasons to Take Out a Personal Loan
If you find yourself in need of financing, a personal loan is an affordable option that lets you spread out the cost of the expenses over several years.
Personal loans give people the ability to meet financial needs or achieve goals quickly and more efficiently through a structured borrowing plan. There are plenty of good reasons to take out a personal loan that still falls under the umbrella of fiscal responsibility. To decide if a personal loan is the right borrowing option for you, you’ll need to analyze your situation as no two borrowing scenarios are the same.
How personal loans work
When you take out a personal loan, the bank, credit union or lender will give you a lump sum of money upfront to fulfill your financial obligation. In return, you agree to pay the money back over some time in regular increments.
You will pay back a little bit more than the amount you borrowed as the cost of getting the money upfront. This is your interest payment, and it’s how the lenders make their money. Ultimately, in most situations, it’s a fair trade-off. You get your money upfront to buy or pay for what you need, and the lender makes a few bucks over a longer term for helping you out.
But before signing on a loan, it’s important to compare multiple offers.
“If you are going to take out a personal loan, do your research,” explains Laura Morganelli, CFP, a financial advisor with Abacus Wealth Partners. “While it is true that the rate you are eligible for is based on your credit score, reaching out to multiple lenders is the best way to ensure you get the best rate possible. However, limit the number of applications submitted, as each one is considered an inquiry against your credit score.”
Reasons to take out a personal loan
1. Debt consolidation
If you have one or many high-interest forms of debt you’re making payments on, you may be able to use a personal loan to consolidate that debt and save on interest.
For example, let’s say you owe $5,000 on credit card A and $5,000 on credit card B. Both credit cards have a 25% APR (what you pay extra each year). If you’re able to get a personal loan for $10,000 with an APR of something like 10%, you can save a ton of money. You take out the personal loan for $10,000, pay off both credit cards, and now instead of owing 25% annually on $10,000, you only owe 10% annually on the same amount. Additionally, your payments will be in one place instead of having to keep track of multiple payments to make each month.
It simplifies your payments and saves you significantly. The best times to look into debt consolidation are when you have high-interest forms of debt, when interest rates drop or when your financial situation improves.
2. Home remodeling
Another fiscally responsible reason for a personal loan is for home improvements or remodeling. Not only do remodels or renovations improve the quality of life for you and your family, but they also add value to your property. So, instead of borrowing the money for something that you won’t see a return on, your loan may turn you a profit in the long run if you sell your home.
3. Medical bills
When life’s unexpected occurrences affect our health or quality of life, often we’re left with no choice but to react. Unfortunately, this can be expensive. Personal loans can help to cover the costs of upcoming medical needs as well as helping to pay existing bills from events that have already happened. If you’ve had an incident, procedure or need to upgrade medical equipment, a personal loan could be of service.
Check with the medical provider first to see if there are payment plans available before resorting to a personal loan. Once you have that information, you’re much more informed on your options moving forward.
4. Alternative to a payday loan
Payday loans are one of the most expensive forms of borrowing available on the market. Typically, they charge astronomical rates for short-term infusions of cash. Many people that take out payday loans do so out of fear of failing to meet a current financial obligation. The problem, though, is that when they can’t pay back the first payday loan, they take out another one and so on. Payday loans breed a nasty debt cycle that may just get deeper and deeper.
A personal loan could be a good alternative for a payday loan when you need cash fast. Unlike most payday loans, personal loans do not require you to pay the money back in one big payment. Instead, your repayment terms are spread out over the years. This means smaller payments that are more manageable for the long term.
Additionally, the rates on personal loans are only a fraction of what you’re charged for payday loans. The APR on a payday loan can be as high as 400%, while the APR on personal loans is usually between around 5% and 25%. And no, that’s not a typo — it’s regularly as high as 400%.
5. Unplanned emergencies
Life tends to play by its own rules. When unexpected emergencies happen that require money, many people are unprepared. With many emergencies, you have no choice but to pay. In these situations, personal loans may be a good resource to bridge the gap between your current financial expenses and the unexpected.
Things like funerals, medical bills, dental work, moving, broken appliances can be unexpected and expensive. Personal loans may help you and your family keep life on track without jeopardizing your overall financial future.
Ideally, we’d all be able to pay for everything we need upfront without the need to borrow. However, the reality of life paints a different picture. If you find yourself in need of financing, a personal loan is an affordable option that lets you spread out the cost of the expenses over several years.