Life happens fast. Weddings, medical expenses, and home projects can appear out of nowhere, and you might have trouble finding the funds to pay for it all.
Before you rush to take out a second mortgage or pile the purchases on a high-interest credit card with a spending limit, you may want to consider taking out a personal loan. Whether you’re looking into a secured loan backed by collateral or an unsecured loan made on the promise of repayment, a loan may be the help you need to pay for those expenses you just can’t cover alone.
What is a Personal Loan?
A personal loan is a lump sum of money borrowed from a credit union, bank, or online lender. Unlike mortgages, student loans, or car loans, personal loans can be used for whatever you like. This can include making purchases, paying for debts, or even financing a vacation.
Personal loans are installment debts or debts that require you to make regular payments every month. As you continuously make payments, the amount you owe decreases until it is paid off. This also means that eventually, the amount you pay in interest will decrease over time.
Loans come with either fixed or variable interest. If your loan has fixed interest, your interest amount will be the same throughout the life of the loan. Variable interest may change over time, based on standard interest rate index.
Qualifying for a personal loan can be much quicker than other loan types. Lenders will consider several aspects of your financial standing, such as your:
The better your credit score and the lower your debt-to-income ratio, the easier it is to get a personal loan. If you have a bad credit score or a high debt-to-income ratio, the lender may still give you a loan, but charge you a higher interest rate.
If you have a low credit score right now, it may be beneficial to wait a few months and improve your credit score before you apply. Contact one of our coaches to get advice on how to make this happen.
Do You Need to Get a Personal Loan?
So what is a good reason to get a personal loan? There are a variety of ways you could spend this extra money, ranging from major purchases to strategic financial help. Here are some of the more common reasons for personal loans:
- Consolidate Debt. If you’re having a hard time managing multiple debts, paying them all off with a personal loan will reduce your debts into a single monthly payment. This single payment may also reduce the amount of interest you pay every month.
- Pay off Credit Cards: Credit cards can have an APR as high as 26%. If you have a high-interest rate or are paying more than one credit debt, paying them all off with a personal loan can free up your credit limit, lower the amount you pay in interest, and combine your monthly payments into one.
- Fixing your credit. Improving your credit does not happen overnight. However, using a personal loan to consolidate your debts or get a better interest rate can give you the edge you need to take control of your credit.
- Pay for a Wedding: With the average wedding running $30,000, it’s hard to come up with the amount of cash needed. Personal loans are frequently used to cover various wedding expenses, such as food and drink, venue rental, transportation, and even the bride’s dress.
More Resources: Financial Planning for Engaged Couples
- Pay for Home Remodeling: Even minor home improvement projects can cost you thousands of dollars. Using a personal loan will not only allow you to make repairs you need but may also add value to your home.
- Pay for Small Business Expenses: Starting a small business is not cheap. If you are unable to qualify for a small business loan, you may have better luck applying for a personal loan to pay for supplies, certifications, and staff.
- Buying a Vehicle: Unlike auto loans, personal loans are unsecured. That means that you will not have to sign the car over in a lien to your lender. You could also use the loan to make any repairs the car may need, or to buy a vehicle such as an ATV or bike, that would not be covered under an auto loan.
Learn More: When Should You Trade in Your Car
- Vacation: Sometimes savings just aren’t enough. If you’re getting ready for a huge vacation, personal loans can help pay for transportation, hotels, or even act as spending cash while you’re away. Of course, anything you do not use can be immediately paid back.
- Household appliances: Household appliances can be more expensive than a simple home repair. If you’re in a pinch financially but cannot live without a working washer or dryer, a personal loan may be the perfect solution to your household problems. It may also be more affordable than a line of credit with the appliance store.
- Funerals: The average funeral costs more than $7,000. if you suddenly find yourself facing this unexpected yet unavoidable invoice, a personal loan can offer assistance in a trying time.
- Emergencies: It can be hard to plan for emergencies. Whether it’s a medical bills, unexpected costs, or natural disasters, personal loans are there in case something urgent comes up that your emergency fund just can’t handle.
Benefits of Getting a Personal Loan
Personal loans are more than a boost of your buying power. They can also be tools that you can use to improve your credit, secure your financial standing, and calm any inner turmoil you may be facing about upcoming costs.
If you’re not sure if a personal loan is right for you, take a look at these top benefits personal loans provide:
- Higher credit limits than a credit card. If your credit score is low, a bank may only give you a credit card with a $300 limit. Personal loans may be much more generous. depending on your lender and credit history, you could borrow up to $100,000 if you qualify.
- Lower interest rate. You may find that a personal loan has a lower interest rate than your current credit cards. Like credit cards, your interest rate will be based on your credit history and original amount borrowed. Be sure to shop around for the best deal before committing to an offer.
- Fixed monthly payments. If your personal loan has a fixed APR, your monthly payments will be the same throughout the life of the loan. This makes it easy to budget your payment and can add a sense of security for your future.
- No collateral. Unsecured personal loans do not require you to sign over any form of collateral. That means that you if you’re forced to default, you do not run the risk of losing your assets.
- Longer repayment period. Unlike payday loans, personal loans can be long term. This means that you would not be expected to completely pay it back for several years. This prolonged period also means small monthly payments.
- Less stress. Being unable to afford something can cause a lot of unnecessary stress on your day-to-day life. Personal loans can help you achieve your financial goals without the strain on your wallet.
Not Sure if a Personal Loan is Right for You?
Although useful, personal loans are not a catch-all solution for every need.
If you’re in the market for a personal loan, you may be trying to find a band-aid for a much deeper financial issue. Before you take out any sort of loan, reach out to our money coaches to find out how your finances are holding up and receive personalized money advice that will get you to your financial goals. In fact, many people wish they would have known about other solutions, like a Debt Management Plan, prior to taking out a loan.