A personal loan is borrowed money that can be used for a multitude of reasons. The most common reasons somebody would get one are to consolidate debt, pay off emergency expenses, or fund a large purchase. Once you get a lump sum of cash, you simply make monthly payments over a set period of time. Depending on how much you pay each month you can pay it off within a couple of months or up to a few years. When compared to using credit cards, personal loans can save you by providing a lower interest rate.
How to Tell if a Personal Loan is Right For You
Taking out a personal loan isn' t ideal for every situation so make sure you compare the pros and cons before you decide to take one out. Personal loans are good if you need a quick lump sum of cash to fund a purchase or to pay off expenses. For example, if you have multiple credit cards and are paying interest on all of them it may be a good idea to consolidate your debt into one single payment with a lower interest rate. Even though a personal loan can make it a lot simpler to pay off your debts, you will need to be prepared to make principal payments plus interest every month. If your income isn’t high enough to cover the payment you can get yourself into a deep hole of debt and hinder your credit score.
Reasons to Get a Personal Loan
1. Debt Consolidation
This is the most common reason why people consider taking out a personal loan. If you have debt on multiple different accounts and are finding it difficult to keep track then this may be a good option for you to consider. You can take all of your payments and merge them into one so that you only have one timeline and monthly payment to worry about. In addition to the simplicity aspect, you can normally get a much better interest rate. This can save you a lot of money in the long run.
2. Emergency Expenses
You never know what type of emergency you may run into nowadays. Things like an unexpected funeral or medical bills can be a good reason to seek a personal loan. The last thing you want to worry about during an emergency is coming up with the money to pay for it. Personal loans from certain online lenders can have the money put into your account as soon as the same day you apply for it. The cost of a funeral or surprise medical bills are not cheap so it is good to know how to take out a personal loan just in case something comes up.
3. Appliance Purchases
Crucial items in your home like a washer or dryer do not come cheap. If one of your appliances decides to poop out on you then it may be a good idea to take out a personal loan. Most people do not have thousands of dollars lying around for unexpected costs. Even though you will have to pay interest on your loan it can be a lot more convenient and cost-effective to take out a loan. Using a laundromat is another option but this can cost you more money in the long run than biting the bullet and paying interest on a personal loan.
4. Vehicle Purchase
If you prefer to buy cars from private parties and not from the company itself you may have to resort to a personal loan. Going to the dealership can be easy, but if you know the right people, sometimes picking up a car from another consumer can save you money down the road. Using a personal loan as opposed to taking money out of your savings can allow you to keep cash on hand and still get a sweet deal from a private seller.
5. Wedding Expenses
The average wedding can cost upwards of $25,000. Couples who do not have that kind of cash lying around can consider taking out a personal loan to help them out. Even if you don’t use the loan to pay off every single wedding expense it can help lighten the load up. In order to keep a solid amount in your savings account, it can be a good idea to consider a personal loan to help pay for all or part of your wedding expenses.
When to Not Get a Personal Loan
Depending on your situation, a personal loan might not make sense. For example, if you are hardly able to make your minimum credit card payments each month then switching to a personal loan can be a bad move. Even though you can get a lower interest rate you will have to pay a higher amount each month. If you cannot afford a higher payment then you are not advised to take out a personal loan.
Certain purchases such as a house or education come with their own loan type. Taking out a student loan for your education expense is usually the better idea. Same with a home purchase, mortgages are made specifically to fund a home purchase so you can get a better deal on that as opposed to taking out a personal loan.
How to Get a Personal Loan
Getting a personal loan is easy but it is a good idea to shop around to make sure you get the best deal. Traditional banks that you may already have an account with are a great place to start looking. Online lenders are also a great option and can get the funds in your account as soon as you apply on the same day. If you are going the traditional bank route you can usually expect to have to go inside of a local branch. The benefit of using an online lender is that you can do it all from the comfort of your own home.
Most lenders will allow you to compare interest rates without a hard inquiry on your credit report. This makes it easier to compare loans to find the best deal. Once you find the best option for your current situation, you can submit a complete application which will trigger a hard inquiry. Once the final application is submitted, you can get the funds in your account within a couple of days.