When to Get a Personal Loan

by Kelly

With regard to personal finances and banking, it’s crucial to be informed when considering taking out a loan. Contrary to mortgages, student loans, and auto loans, personal loans can be granted for almost any situation. Nonetheless, you must always do your research and ensure that you are borrowing from a reputable financial institution.

Depending on the total value of the loan requested, some lenders may require the borrower to define the purpose of the loan being sought. Nevertheless, in most cases, the borrower can use the loan as he or she wishes provided that approval for the loan has been granted. Remember that both your credit score and debt history will have an impact on how much of a loan you may be able to request. In addition, your prior credit history will directly impact the rates and terms of the loan offered.

Some of the most common reasons for applying for this kind of loan include personal debt consolidation, financing major purchases, or striving to improve a credit score. If you find yourself in a situation that may require some extra padding for your finances, a personal loan may be the right choice to help lessen the burden of many of the curveballs that life throws your way.

Debt Consolidation

Whether you are seeking to consolidate credit cards or looking for a way to refinance your student loans, a personal loan can help you avoid high-interest rates and make your monthly payments more manageable. While consolidating credit debt comes with its advantages, you must be aware that you can lose some of the benefits that come with student loans. These include the ability to defer payments or to claim interest payments as part of your tax return.

Financing Major Purchases or Expenses

Sometimes, loans make sense for making major purchases like replacing old furniture or household appliances, funding a vacation or honeymoon, or financing an unexpected medical bill or expense. Since personal loan rates tend to be lower than credit card debts, they may help alleviate some of the immediate and long-term effects of major expenses.

Mending Your Credit Score

If most of the debts on your credit history are from credit cards, having a loan on your credit report will help add variety to the kinds of accounts on your report. Having multiple accounts on your credit history has a tendency to yield a higher credit score. Likewise, maintaining your monthly payments for your loan can help to build your personal credit and improve your credit score over time.

It’s crucial to note that personal loans are paid in installments. Although you will receive the full amount requested upon the disbursement of the loan, you must understand that it is your responsibility to make monthly payments each subsequent month after receiving the loan. Personal loans are not secured loans, and for this reason, their interest rates tend to be higher than secured loans with a specific purpose. Despite the fact that personal loans are unsecured, many people find that the rates for personal loans can be much lower than those of credit cards.

Anytime you make an important banking or personal financing decision, make sure that you are working with a reputable lender. Be prepared to fully explain your situation, and do not hesitate to ask questions. Lastly, make sure you receive explicit terms in writing before making a commitment to any lender.