Borrowing money may not seem like a great idea on the surface. Naturally, if you can't afford the payments, then getting a personal loan isn't smart. It will put you further into debt and creates a cycle you can't get out of.
But, if you have good credit and can afford the payments, there are plenty of reasons to get a personal loan. It can help you get ahead financially and achieve certain goals.
What is a Personal Loan?
A personal loan is money you borrow for personal financial reasons. You don't have to give a specific reason as you would when you buy a car or house. Banks offer personal loans as a secured loan or unsecured loan. A secured loan requires collateral, and the bank will likely ask why you want the loan; an unsecured loan doesn't require collateral, so the bank won't ask why you need it.
How It Works
Most personal loans have a fixed interest rate and a fixed payment for a specific term (typically 1 to 5 years). If you have good credit scores, you should be able to get a low interest rate.
Like any other type of loan, you make the same monthly payment each month for the term. Assuming you make your payments on time, you'll pay the loan off by its maturity date. Your qualifying factors – such as your credit score and current debt load – will determine the interest rate.
Reasons To Get a Personal Loan
Debt Consolidation
Credit card debt or student loans can send any budget out the window – the high interest rates leave little wiggle room in your cash flow. Consolidating debt into one personal loan does two things: it lowers the amount of interest you pay (you save money) and makes it easier to pay your debts on time. Having more than one debt with different payment dates and amounts makes repaying your debts more complicated. With one payment, you're less likely to miss the due date and pay late fees.
Home Improvements
Investing in your home is one of the best investments you can make. If you make home improvements that increase your home's value, such as installing a solar energy system, you come out ahead. Even though you pay interest on the personal loan, there's a good chance you'll earn more than what you paid out with the increased value of your home. You might also consider a home equity loan.
Pay for Large Expenses
Large expenses, like a wedding or vacation, can drain your savings account or put you into credit card debt. Unless you have a 0% APR credit card, you'll pay a lot more interest on credit cards than a personal loan.
If you borrow the money with a personal loan, you'll likely get a better interest rate. You'll save money and still be able to enjoy your wedding or vacation.
Start a Business
All businesses, no matter how small, have startup costs. Even if you work from home, you'll need office equipment, inventory, and/or services to help you set up your business and run it. Rather than draining your savings account, use a personal loan as your capital. You can borrow the money, start your business, and pay it back faster if your business takes off.
Cover Emergency Expenses
If you don't have 3 to 6 months of expenses set aside for emergencies, you could find yourself in trouble when you need it. A personal loan could be a great way to cover an emergency expense without going broke. Many people turn to payday loans because they are instant, but you'll pay for that ‘instant gratification' with excessive interest rates and fees. A personal loan will take more time, but is one of the best loan options when you're in a bind.
Other Reasons to Get a Personal Loan
Moving Costs
Short distance moves typically don't cost much, but moving across the country can be expensive. A personal loan can help with the thousands of dollars it costs to pick up and move a long distance.
Cover Medical Bills
High medical bills, such as an unexpected surgery, fertility treatments, dental surgery, or a chronic illness for yourself or a family member can cause financial issues that can exceed your emergency fund. While some medical billers offer payment plans, most charge high interest rates to cover the costs. Some even require payment upfront if your insurance doesn't cover it.
Using a personal loan to cover medical bills can help offset the costs and potentially save you money on interest in the long run.
Buy a Car
Applying for a personal loan to buy a car makes sense if you're buying a used car. Interest rates on auto loans are typically higher than interest rates on personal loans, especially if you have bad credit. Borrow the money and use the loan funds to pay for the car. You may secure a lower price because you'll be considered a cash buyer and you'll save money on interest over the loan's term.
Should you Get a Personal Loan?
Before applying for a personal loan, ask yourself the following questions to make sure it makes sense to do so.
Can You Afford the Payments?
Personal loans, like any loans, have required monthly payments. If you aren't sure if you can afford them, you can hurt your credit score and wreck your personal finances. Review your budget and monthly cash flow carefully to make sure you can afford it.
Are My Reasons to Get a Personal Loan Legitimate?
Just because you have good credit and qualify for a personal loan doesn't mean you need to borrow money. Do you have other money you could use to pay for the expense? What would using that money do to your finances? If you'd rather save the money and pay the minimal personal loan interest, then it makes sense.
Are There Other Options?
Certain types of expenses – like college, a funeral, or buying a car – have other financing options. Compare the options to see which one saves you money and makes the most sense. Compare the interest rates and total loan cost when deciding.
Bottom Line
Look at all your options and reasons to get a personal loan. Most importantly, make sure you can afford the monthly payment. If you have great credit scores and a legit reason, using a personal loan to cover certain expenses can be a great idea.
