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The Best Reasons To Use a Personal Loan
The idea of carrying debt is something that doesn't make anyone happy. But you might find yourself in situations where you need to borrow money. Personal loans are among the top options that most people use when they are in a tight spot financially.
Most personal loans are unsecured, meaning there's no need to pledge collateral and put your assets at risk in case of default. Plus, you can practically use them for anything. But like other types of loans, a personal loan can bring more harm than good to your finances if you don't know how to use it wisely.
To help you make a better decision, here are some top situations where you should use a personal loan.
1. Boost Your Credit Score
Credit mix is one component of your credit score. Typically, it considers how well you manage different types of credit, such as installment accounts or revolving accounts. Installment accounts include mortgage, car loans, and personal loans, while revolving accounts consist of credit cards.
Note that lenders perceive borrowers with diverse account mix more favorably than those who only have credit cards, even if both use credits responsibly. If you don't have any installment loan in your credit history, adding a personal loan can support your credit mix and boost your credit score.
2. Cover Emergency Expenses
Even with utmost financial planning, major unexpected expenses can throw off your budget. You can put off some of those expenses, but others may require immediate attention. Ideally, you should have an emergency fund to pay for them. But not everyone can set aside a certain amount for emergencies.
If you don't have an emergency fund or you have one, but it's not enough to cover certain expenses, a personal loan would be a practical solution. You can use a personal loan for anything; however, it's worth noting that not all unexpected expenses are real emergencies.
Below are actual emergency expenses that you can cover with a personal loan:
- Medical emergencies
- Unexpected job loss
- Extra education expenses
- Sudden car repairs
- Funeral costs
3. Consolidate Debts
Making monthly payments to multiple lenders can cause a lot of headaches. It can also be costly, especially if you're dealing with high-interest debts. But you can get your debt under control by consolidating them with a single payment. There are several ways to consolidate debt, but personal loans are an ideal choice.
A reputable online lender clarifies that you can use a personal loan for anything, including paying off multiple debts. Doing so would enable you to lower interest costs, make your debt payments more manageable, or even shorten the repayment timeline.
You'll know the repayment period of a personal loan ahead of time. Typically, it can go three to five years, depending on the loan amount and other factors. But note that it will only work best if you're able to secure a personal loan for a lower interest rate, such as the CreditNinja loans in Waukesha, WI.
4. Upgrade or Repair Home
Necessary alterations or repairs for your home can eat up large sums of cash. On average, homeowners could spend about $9,081 on home improvement, maintenance, and home-related emergencies.
You can tap into your home's equity, but the amount you can borrow is tied to its value. Plus, it has a longer repayment term, and lenders can foreclose your home if you fail to repay the loan.
If you don't want to put your home at risk, a personal loan would be a good idea. Unlike home equity loans, the approved amount for a personal loan depends on your credit history, income, and employment. The application and approval process is also often faster and easier.
5. Make A Necessary Large Purchase
When the cost of a specific project gets mixed in with other living expenses, it can be harder to plan your finances. The good news is, you can use a personal loan to make any necessary purchase. Although a credit card can be an option, you might end up paying more since their interest rates are higher.
Personal loans, on the other hand, have a low-interest rate and fixed monthly payments. It would be easier to manage since you know how much you're going to pay every month.
6. Fund A Business Venture
Entrepreneurs usually secure a business loan to fund their business. But some start-ups may have a difficult time qualifying for one. Most banks consider the financial history of your business before they approve you. They have to ensure that you have a steady stream of revenue to repay the loan.
If you're planning to fund a new business venture but can't qualify for a business loan, a personal loan can be an excellent option. Instead of looking at your business history, lenders will evaluate your eligibility based on your credit score. Unlike business loans, a personal loan requires less documentation, and the loan decision is much faster.
7. Pay for Moving Costs
You might find yourself in situations where you need to move into a new home. Whether you're losing a job, downsizing because of high maintenance costs, or other unexpected reasons, an emergency move can cost you some money.
A personal loan can help you cover moving costs, such as hiring movers and transporting your things to the new location. You might also need to pay a security deposit for a new apartment or the cost of furnishing a new home. Securing a personal loan could help you with any extra expenses.
Points To Consider Before Getting A Personal Loan
You can get a personal loan for any reason. But remember that it's borrowed money and you have to pay it back on time. Here are some points you need to consider before getting a personal loan:
- Are you going to save money if you consolidate your debts with a personal loan?
- Are you using a personal loan for an actual emergency expense that you have to pay?
- Does taking out a personal loan provide you with an opportunity to improve your finances?
- Can you ensure to make monthly payments on time?
If you can say yes to any of the questions above, applying for a personal loan might be a good idea.
Improve Your Finances With A Personal Loan
A personal loan can be a great tool to improve your finances. But like other financial tools, the power of personal loans to help you largely depends on how you decide to use them. For example, getting a personal loan to buy nonessential items can only hurt your finances more. So, always make sure that you're using this financing option for good reasons.
David Owens is a seasoned content writer specializing in finance - debt management, entrepreneurship, and business finance.
When not writing, he travels with his cat, Mellie.