When, How and Why to Consider a Personal Loan
Many people consider taking out personal loans at some stage of their lives. It is not uncommon to find yourself in sudden need of extra funds, and a loan can provide a welcome solution. However, if and when this need occurs, the decision to apply for a loan should always be carefully considered. Used responsibly, loans can be a strategic tool to improve your financial future. Used irresponsibly, loans can be a detrimental burden to your credit standing.
Consider, for example, payday loans. These short-term, easily accessible loans are intended to last you until your next payday, and are a typical choice for people who find themselves in a temporary financial bind. The drawback though is that these loans can charge exorbitant interest rates, with a typical two-week payday loan incorporating an annual percentage rate (APR) of almost 400%.
Considering these interest rates, there are safer options for securing a loan. A personal loan from your local credit union or bank might not be as quick and easy as a payday loan, but the long-term benefits are worth it. Before signing on the dotted line though, it’s important to take into account exactly how personal loans work in order to assess whether one is right for you.
Why and When You Should Consider a Personal Loan
A few circumstances in which a personal loan may be the right decision include:
- You are using it to pay off debt with higher interest: Debt consolidation is a smart way to use personal loans to your advantage. With the average credit card APR currently standing at over 16%, it can be beneficial to use personal loans to pay off high-interest credit cards.
- You need it for an emergency home repair: Sometimes, things need to be fixed as soon as possible. While a Home Equity Line of Credit is one option for homeowners, a personal loan can be more appealing for those who don’t want to withdraw against their home.
- You need it for sudden medical expenses: By definition, medical emergencies require immediate attention. Personal loans can be a good way to financially cover your expenses in the event of such emergencies.
Of course, once you have an informed reason to apply for a personal loan, you should also have a repayment plan in place. Paying off loans on time can have a positive impact on your payment history, and will ensure that you maintain your good credit score.
When evaluating your personal loan options, here are some factors to consider:
- Interest rates: Other than the interest rate itself, you should evaluate whether you want a loan with a fixed or variable rate. Be aware that variable rate loans tend to have interest payments that increase over the period of the loan, meaning the longer you wait to pay the money back, the more you’ll end up owing.
- Secured vs. unsecured: Secured loans incorporate collateral, such as a car loan or a mortgage. Unsecured loans, however, do not. While most personal loans are unsecured, you may be able to get a secured one as well (such as against a Certificate of Deposit). Secured loans tend to have lower interest rates, so this can be helpful option.
- All fees involved: Some lenders may charge additional fees, such as loan origination fees and prepayment penalty fees.
Looking for a Personal Loan with a low, fixed rate?Learn More
How to Apply for a Personal Loan
If you’ve decided that a personal loan is an intelligent choice for your situation, the next step is to apply for one. The process is fairly straightforward and requires a little bit of homework on your part to acquire the appropriate paperwork.
- Find out your credit score: Your credit score is a major factor in determining the loan’s conditions. Avoid surprises by knowing where your credit stands ahead of time.
- Choose the right lender: Come up with a list of potential lenders and evaluate them based on the criteria above, then determine the one that’s best for you.
- Get the proper documentation: As part of the application process, you will be asked to provide personal information, such as income documentation and your Social Security number. Collect this information early can help speed up the process, so it’s both sourcing all the relevant documentation as soon as possible.
- Fill out the application: When you have the necessary documents in place, you can fill out the loan application. Many lenders will allow you to apply online, which can mean approval in just seconds. Otherwise, banks accept applications as hard copies and the process typically takes seven business days to approve your application and distribute the awarded funds.
Applying for a loan doesn’t need to be daunting. If you carefully consider your needs and properly weigh up your options, a well-considered personal loan can be just what you need to get a little breathing room in your financial situation.
If you're still unsure as to whether a personal loan is right for your unique situation, schedule a free financial planning consultation and our team will be happy to help you work toward achieving your financial goals.