There are many advantages to taking out a personal loan. It can be used for any reason that isn’t illegal or immoral, but in many situations, a personal loan is not the best option.
Personal loans are unsecured, so if they can’t be paid back, the bank or the lending institution will be on the hook for the money borrowed. This gives the bank an incentive to make sure that you are capable and willing to pay back the loan. It also, usually, means that you will be charged with a higher interest rate on the money borrowed.
Buying a house or a car could be done with a personal loan, but, since there is collateral available for both of those loans, it could end up costing you much more in interest payments and make it harder to qualify. Paying off student loans is also not the best use of personal credit. The built in low interest rate is difficult to lower and, unless you are consolidating a number of debts, it usually isn’t worth it.
1. Debt consolidation
A debt consolidation loan merges several existing debts into one bill. This allows you to make one payment per month instead of many. It is also possible to lower your interest rate on some, if not all, of these existing debts making it less expensive to pay off.
Debt consolidation loans are a good way to get a handle on your finances and prepare yourself for larger purchases in the future. For example, if you are thinking about buying a house but have dozens of debts that have to be paid every month, your debt-to-credit ratio could be too high to get a mortgage loan. By consolidating your debts, you could lower the ratio and qualify for a mortgage loan.
2. An alternative to credit cards
Credit cards have a high interest rate on balances that are carried for more than a month. By paying off these balances, you can give yourself some breathing room in your monthly bills. Very similar to debt consolidation, and often part of it, paying off credit cards can give you a fresh chance at controlling your bills.
It is important, however, to avoid the same spending habits that created the situation. Changing your spending habits after paying off your credit card balances is the only way to avoid running into the same situation months down the road.
3. Home renovation
While a mortgage loan might be the best way to buy a home, a personal loan can be a less expensive and easier means to renovate or fix any issues your current home has, especially if you already have multiple mortgages on your house.
The low interest rate on personal loans can make them easier to pay back and the nature of personal loans allows you to decide, without outside input or restrictions, on the nature of the improvements. While a bank might not see the desirability of adding an additional bathroom to an existing home, you are given a free hand in the nature and scale of the renovations.
Personal loans are best when used for purchases or paying off existing bills that other loans do not cover. Interest rates are variable due to the lack of collateral needed for the loan and, in some cases, a personal loan can save you a great deal of money on interest payments. As with all loans, you should speak with a trusted bank or financial institution to get the most reliable information on what options are available to you.