A personal loan is a type of financing that gives you the ability to borrow money with fixed terms. This means you’ll know precisely how much you need to pay every month before the term ends at a specified time in the future. Taking out a personal loan is one of the easier ways to get money, which you can use for a variety of purposes. It can be used for renovating a home, covering unexpected medical expenses, purchasing a car, or even opening up a new business.
In most cases, personal loans even offer better rates than credit cards, which make the former a more attractive option. However, despite the advantages that personal loans offer, there are risks you need to consider.
One of the most important things to think about is whether a personal loan is right for your particular situation. You can decide to get a personal loan for several reasons, the most common of which are the following:
⦁ You need to pay for medical expenses – A personal loan can help shoulder the costs that your medical insurance does not cover.
⦁ You want to consolidate credit card debt with high interest rate – If you have several high-interest credit card debts, one way to make the payments more manageable is to take out a personal loan with low interest rate. The prospect of having to make payments only once a month also makes taking out a personal loan for debt consolidation more appealing. Understand, however, that while your monthly expenses may become easier to manager, you are likely paying more because of the longer loan term.
⦁ You need to make a major purchase – Sometimes, interest rate on personal loan is lower than credit card interest rate, which makes it the ideal option if you need to make a large financial outlay, such as engagement ring or paying for wedding expense. Note that this is option ideal only if you have healthy spending habits.
⦁ You need to pay for home repairs when you are unable to have home equity loan access – If you don’t have adequate equity to qualify for a home equity line of credit, getting a personal loan may be the answer. Likewise, it’s a good idea to take out a personal loan if you’re planning to refinance your home to pay for the loan.
While a personal loan can be used for different purposes, there are times when it’s not your best option, such as in the following:
⦁ You want to consolidate debt from your student loan – Consolidating your student loan is possible through the government, so you don’t need to get in touch with an external lender.
⦁ You may qualify for a home equity line of credit – Before you consider getting a personal loan, check if you have assets that you can borrow against. A home equity line of credit, for example, has lower interest rates and also comes with tax benefits.
⦁ You can borrow against your 401(k) loan – In some instances, borrowing against your 401(k) is better than taking out a personal loan, such as when you have the discipline to pay back the loan every month for the next five years, as well as the ability to pay the whole loan amount before you leave the company.
So, is a personal loan right for you? It depends on your unique situation. If your overall interest expense payments will be lower if you take out a personal loan, then it is worth considering. Understand, however, that taking on any type of debt has long-term consequences.
Be sure to weigh the different outcomes of various options so you’ll be confident when it’s time to make the decision. You want to alleviate your financial situation, and not get into further trouble. Take the time to analyze your situation and your options so this does not happen to you.