While personal loans can have a very negative reputation and are sometimes associated with unwise financial decisions, there are many responsible reasons to take out a personal loan. You can finance a business expansion, buy a house, or consolidate credit card debt – and those are just a few of the many ways personal loans can help you out. If you’re considering taking out a personal loan, here is some information to help you decide if it’s the right option for you.
What is a personal loan?
As the name suggests, a personal loan is a loan that you can take out for personal needs. There are many different lenders that offer these, and you’ll want to make sure you are aware of the interest rates and fees as they vary immensely for different lenders.
Once you accept a loan offer and receive the funds, you will be expected to make a regular repayment. Typically, these repayments happen monthly but some personal loan offers may require weekly or biweekly repayment schedules. When you take out a loan, you will also be paying interest on the amount that you borrowed but that total amount is generally factored into your repayment schedule from the beginning.
Will applying for a personal loan hurt my credit score?
As with any kind of credit application, applying for a personal loan will lower your credit score a few points but that can easily be remedied by several months of managing your finances responsibly and not doing anything that could possibly ding your credit score again.
That said, you can also prequalify for many loan offers which does not require any kind of hard credit check. This allows you to see which loans are most likely to be offered to you based on your credit score and other factors such as employment. Not only does this help you plan as you can see multiple offers at once but it also means you can be far more selective about the loans you submit a formal application for.
What are personal loans used for?
While every loan has its own terms and conditions that must be followed, there are countless ways that people use personal loans every day including:
- Debt consolidation
- Medical expenses
- Buying a home
- Emergency car or home repairs
- Buying a new car
- Pregnancy and delivery costs
- Engagement rings
When are personal loans a bad idea?
If you’re unable to manage your finances responsibly then personal loans may cause more problems for you in the long run, especially if you are seeking a personal loan in an effort to consolidate debt. One of the biggest factors that lead to a higher credit score is the number of on-time payments. Missing a single payment could dock your credit score significantly so if you don’t anticipate being able to adhere to the repayment schedule outlined with your loan offer, then you should not consider a personal loan.
It’s also unadvisable to take out a personal loan if you are able to find a cheaper or more effective option elsewhere. While personal loans can be a great fit for certain people and certain situations, others may be able to seek payment plans, apply for low interest credit cards, or consider balance transfers which allows one to transfer their balance to a credit card with a better interest rate in order to save money.
When are personal loans a good idea?
On the most basic level, personal loans are a good option for anyone who is using them strategically and will be able to commit fully to the repayment schedule outlined with the loan offer. If you’re not able to make those monthly payments, taking out a personal loan is likely to be more trouble than it’s worth.
Beyond that, personal loans are a good idea for anyone who is able to qualify for loans with lower APRs. While the loan amount you are offered may instantly seem ideal, make sure you are paying attention to other details such as the interest rates and hidden fees. A loan of $500 can end up costing thousands in the long run if you accept a loan with sky high interest rates, origination fees, or prepayment penalties.
Personal loans are also a good idea for large purchases such as a house or car. Home loans and auto loans are extremely common types of personal loans and you may be able to find a deal or receive some kind of perk if you take out a loan when you’re making this type of purchase.
It’s a good idea to restrict the use of personal loans to somewhat essential purchases or investments. Homes are vital and in certain areas cars are crucial as well. While you can technically use funds from a personal loan for extravagant expenses such as parties, weddings, boats, etc., it’s not considered a wise decision to do so. Use personal loans for essential things such as medical expenses and save up for anything that’s just nice to have.
While personal loans are not always the answer, there are some situations where they are a completely reasonable option to consider. As long as you can make your payments on time and aren’t sinking further into debt to do so, personal loans may be the best idea for you.