If you want access to money, personal loans are one of the options available to you. It gives you the benefit of lump-sum payments, fixed monthly payments, and often, lower interest rates.
Because of this, you can use it for a variety of reasons—like home improvements, buying a car, or consolidating your debt. In simple terms, when you manage it well, a personal loan can fill up gaps in your budget when you need money most.
In this post, we'll take a look at some of the benefits of using a personal loan in more detail.
The following is a guest post. Enjoy!
What Is a Personal Loan?
According to Bankrate, a personal loan is a loan from a bank or other financial lender that gives you a lump sum of money. The amount of the loan can be anything from $1,000 to $50,000 but can vary depending on the bank or institution or with different types of loans.
You'll then repay this amount in fixed monthly payments over the repayment period. The repayment period typically varies between one and 10 years, depending on the lender.
Personal loans are unsecured. This means you do not require any collateral to access the funds. In simple terms, unlike mortgages where your home serves as security, a personal loan requires no such security.
Also, interest rates are typically fixed for personal loans. This means your interest rate won't change during the repayment period. As a result, you'll have a predictable repayment schedule which makes it easier for you to budget.
When Is It a Good Idea to Take Out a Personal Loan?
While you should always carefully consider your current financial situation before getting a personal loan, there are some cases where it can benefit you.
Build Or Support Your Credit Score
Typically, when you want to apply for credit you need a good credit score. Unfortunately, to get a good credit score, you need to have credit. So, if you want to build up or support your credit score, it is around advice to apply for a personal loan, even if just for a small amount. If you manage it well, you'll improve your credit score in the process.
Pay For Planned Expenses with A Lower Interest Rate
A personal loan may be a good idea to pay for planned expenses. Some of these expenses include:
Buying a car. Although you'll typically get a better deal when you buy a car with a car loan, a personal loan may be your best bet when buying from a private seller. In this situation, lenders typically won't finance the deal.
Home improvements. If you don't have enough equity in your home to qualify for a home equity loan, a personal loan may be a good choice to do some home improvements.
Vacation. A personal loan may be a good choice to pay for a big family vacation. It allows you to spread out the vacation expenses over a period of time.
Wedding. Many couples don't have the cash available to pay for their wedding. For them, a personal loan may be a good option.
Keep in mind, though, that a personal loan will only be a good option when your credit history and income allow you to get a lower interest rate than you'll get on a credit card. Also, if you already have such a low-interest credit card, but not enough credit available, then you could also consider a personal loan.
Consolidate Multiple Debts
One of the main reasons people apply for personal loans is to consolidate their debts. By consolidating multiple existing debts into one personal loan, it makes it easier to manage. Also, it makes it more predictable because they'll have a fixed monthly payment.
To illustrate how this works, let's look at a simple example. Let's say you have seven other loans and credit cards that you're currently repaying. This means you have seven monthly repayments you need to manage. Also, as some of these payments can vary due to interest rate changes, it can affect your budget, too.
If you then use a personal loan to consolidate these debts, you'll end up paying one fixed monthly payment for all of them.
Refinance Your High-interest Debt with A Lower Interest Personal Loan
Now, let's take consolidation one step further. Apart from making your debts easier to manage, it can also save you money.
Let's say you have $20,000 worth of debt through other loans and credit cards. Now, let's say you pay, on average, 6% interest on these debts. If you want to pay these debts off in three years, you'll need to pay about $610 a month. If you consolidate these loans into one personal loan with an interest rate of 4%, your repayment will come down to $590.
For this to work, the ideal debt consolidation loan needs to have a lower interest rate than the average rate on all your other debts. Also, it must have a significantly lower monthly payment than all the other debts combined.
Conclusion & Recommendation
Although it's generally recommended not to incur unnecessary debt, a personal loan can benefit you in some cases. Hopefully, this post illustrated some of these cases in more detail.
