About 83.5 million (34%) Americans took out a personal loan in 2018. The reasons? Well, vehicle expenses, pending bills, tuition fees, emergencies, debt consolidation, etc. As you may have noticed or already know, personal loans don’t come with usage restrictions. This is why many people take out these loans. In addition, these loans come with low interest rates and other favorable terms. However, it’s these advantages that eventually lead people into debt
That’s why you need to be smart when making a decision to take out a personal loan. This article highlights four times you should consider taking out a personal loan.
Table of Contents
1. When Consolidating Debt
Debt consolidation is a common method many people with multiple debts use to get rid of them. The best way to go about this is by taking out a personal loan. Often, borrowers will use these loans to consolidate their credit card debts. However, some people use these loans to consolidate others with higher interest rates.
Here is how to go about consolidating. First, you’ll need to shop around for the best personal loans in the market. During this stage, you may want to pay attention to those that allow for debt consolidation. Next, find out whether you qualify for the amount equal to your total debt. Once approved, you can use this loan to clear your current debt.
Debt consolidation allows you to put all your debts under one “roof” and pay them as a single loan. Often, this will be under a new but lower interest rate. As a result, you’ll save a lot of money in interest. In addition, you get to pay off a single loan instead of multiple loans. Another benefit is that you’ll have a fixed timeline for repayment. This means you’ll know when you’ll be debt-free, especially if you had revolving debt.
Having many loans, however, increases the possibility of forgetting some, and you’ll end up paying penalties for late payments. Even worse, you can get a reduction in your credit score.
Having said that, when considering debt consolidation, make sure you’ll save more than the loan fees you’ll incur when taking out this type of loan, such as origination fees and other related costs. Otherwise, it’ll defeat the purpose of the entire process.
2. During Emergency
Foreseeing the future with certainty is impossible. The best you can do is prepare for it and even then, there’s only so much you can do during an unforeseen emergency. You may be cash strapped and failure to have the money for these emergency expenses may result in serious consequences. Here are some of the emergencies that warrant a personal loan:
- A medical emergency that requires immediate financial intervention.
- A car repair that needs extra funds to get it back to operation. Failure will mean getting to work, buying groceries, etc., will be an uphill task.
- You need funds to cover home repairs, especially if the damage renders your home unlivable, such as a serious roof leak.
While taking out a personal loan will get you out of a financial jam, this will only be in the short-term. The best way to counter this is by setting up an emergency fund, allowing you to cover the emergency without having to borrow.
Nevertheless, there are times when the emergency fund may not be enough, and there aren’t any other solid options available. This justifies taking out a personal loan; just make sure it’s one that will not cost a lot of money in interest.
3. When You Want to Make More Money
You need money to make more money. That’s how it works, but money isn’t always available, and so a money-making opportunity may pass you by. However, you don’t have to watch an opportunity skip right past you, since a personal loan can come in handy. Take a look at some of these instances:
- You need funding to start or expand a business into a new market and rake in more revenues.
- You need money to pay for a home upgrade that will improve its value.
- You need to take a course that will add more skills and, in return, elevate your career.
Keep in mind, nothing is guaranteed. The business may not make it past the first year. Your home may not get off the market as fast as you expected, or you may not get the promotion you eyed even after taking a new course. This means you’ll have to pay a loan that didn’t get the results you desired.
This is why it’s recommended to do thorough research on the opportunity before investing in it. If there’s a great possibility to make money, taking out a personal loan is more than justified.
4. When You Want to Improve Your Credit
Credit mix is one of the factors lenders consider when assessing your creditworthiness. It refers to the different types of loans you have. Having various types, such as a credit card debt, mortgage, and a student loan shows the lender you can handle debt just fine. Adding a personal loan to your debt list will improve your score if you previously had only one type of debt.
The other way toward credit improvement is by lowering your credit utilization ratio. This is the amount of debt compared to the credit limit. A low ratio is good for your score, and one way to lower it is by taking out a personal loan. This will avoid more credit card usage and lowering your credit utilization ratio. The final way a personal loan will improve your score is when you repay the loan on time.
When to Take Out a Personal Loan
The best part about taking out a personal loan is you don’t have to explain how you’ll spend the money. You can go on vacation, pay for your wedding, or even make a purchase. However, not all scenarios are suitable for a loan.
To know whether taking out a personal loan is the best decision, take the time to answer these questions:
- Will consolidating your debt save you money?
- Will the loan help you to make more money or seize an opportunity?
- Do you have an emergency expense you need to pay immediately?
- Will it improve your credit score?
If the answer to these questions is yes, then taking out a personal loan is a great decision. The bottom line is that personal loans can come in handy. However, it’s important to first analyze your financial position before taking out a loan. If you can’t do this by yourself, consider seeking the services of a financial expert.
