When to Get a Personal Loan

Personal Loan

There are times in life when extra cash would be a big plus, and putting the expenses on a high interest rate credit card might cost you more than it’s worth. Maybe you’re planning for a happy milestone event like a wedding or big anniversary party, or maybe it’s an unexpected medical or car repair expense and you don’t have an emergency fund. Or maybe it’s somewhere in the middle, and you need to cover moving expenses or home improvement and repairs. And if you’ve already racked up some high interest credit card debt, rolling multiple payments into one manageable monthly sum (and potentially paying less in interest!) would make your life easier.

These situations are exactly what personal loans are designed for, enabling you to borrow the money you need, when you need it, and pay it back a little at a time if you have reasonably good credit. A personal loan can be an effective solution when:

  • You need money soon and don’t have time to save up
  • The interest rate is lower than other options
  • You’ll be able to make payments according the loan terms

Personal loans are installment loans; if approved, you’ll receive a lump sum of cash that you repay in fixed amounts every month until the loan term expires.

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Types of Personal Loans

Unlike a secured loan, such as an auto loan or mortgage, most personal loans are unsecured. Personal loans don’t require you to use the money for a specific purpose or put up collateral like your home or your car. That means you’re borrowing the money based on your creditworthiness alone, without offering something of value as a guarantee of repayment.

Unsecured loans present a higher risk for the lender since it’s essentially relying on your financial reputation to guarantee repayment. So this option carries a higher interest rate than one secured by an auto or a home. If you don’t repay a loan backed by such an asset on time and according to the terms, the lender can take your collateral or foreclose on your property.

When a Loan Makes Sense

You can take out a personal loan, for instance, to pay for a home improvement project or consolidate debt.

For example, using a personal loan for home renovations or improvements can make sense, especially if the project adds value to your home, like a kitchen or bathroom renovation. You avoid running up credit card charges or having to pledge your house as an asset, like with a home equity loan.

And if you need the money right away, perhaps to make emergency repairs or take advantage of special pricing or contractor availability, a personal loan generally has fast approval time and funding times. While it might be ideal to plan ahead and save up for a renovation, sometimes it just isn’t possible, and a personal loan can be the answer.

It also doesn’t make sense to pay more interest on a higher rate credit card if you can consolidate your debt  with a lower-interest personal loan. (Keep in mind that if you are already stretched too thin credit-wise, you may not qualify for a personal loan.)

When a Personal Loan Isn’t The Right Answer

Personal loans can be very useful in the right situation, but they’re not always the right answer. For instance, yes, extra cash can be good to have on hand, but maybe not if you don’t have a specific plan in mind. Feeling flush with cash may tempt you to spend money—and pay unnecessary interest—on things that are not essential.

If there’s not an urgent or immediate need for the money, it might be wiser to build up your savings to pay for a large purchase instead of taking out a personal loan and making payments with interest for many years. After all, a personal loan isn’t a no-strings-attached windfall; you will have to pay it back with interest.

And speaking of paying it back, you will need to consider the loan’s repayment schedule and monthly payments. Make sure you you can afford the monthly payments, which include interest, for the time you’ll spend paying it off.

One other thing to think about, especially if you’re using a personal loan to consolidate debt, is your spending habits and relationship with your finances. A personal loan can help you get back on course if your finances have taken a hit from an emergency or unexpected expenses. But if you’ve incurred considerable debt from overspending or not paying close attention to your where your money is going, you may want to use debt consolidation as a reset. Don’t pay your credit cards off with a personal loan, then immediately begin building up a new credit card balance.

How to Get a Loan

Before you fill out a handful of online loan applications , check out the terms and interest rates to see what’s available, what’s affordable and what’s realistic. Understand that every time you apply for a loan, your credit score can take a hit, which may jeopardize your chances of getting the loan — or of paying a lower rate. Check available rates, including where you bank regularly. If you have a history with a lender, even just a checking account, it may be easier to qualify for a loan even if your credit isn’t great.

Because you get the money all at once, it’s best to have a plan for how the money will be used and how you’ll pay it back. One lump sum can make it easier to make a large purchase or consolidate debt. Likewise, the fixed interest rate and predictable monthly payment make it possible to plan ahead when considering repayments.

To determine your eligibility, a lender will check your credit and income to gauge your ability to repay the loan. Applicants with high credit scores, strong income and low debt usually receive the lowest rates. Keep in mind that personal loans, especially unsecured personal loans, may have more stringent requirements than other types of loans. Poor credit or a short financial history may make you ineligible for a loan. Make sure you know what the requirements are, and more importantly, if you’re able to meet them, before applying for a personal loan.

Is a Personal Loan Right For You?

Personal loans can be a solid financial move if you use them appropriately. What you use them for and your ability to repay the loan can greatly impact how effective they are for you. If you meet the following criteria, a personal loan may be right for you:

  • You need the funds quickly and don’t have time to save up
  • You have a strong credit score. Some debt is okay, but most lenders do have a minimum credit score to consider when making a loan
  • You want to pay off high-interest debt. Personal loans are a good way to consolidate and pay off costly credit card debt
  • You’ll use the funds toward necessary expenses. Other good reasons to use personal loans include paying for emergency expenses or remodeling your home

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