Posted on June 3rd, 2022.

Personal loans are good for a variety of purposes—from consolidating debt to putting in that pool your family has always dreamed of. But they are personal, which means your reasons are yours.

If you’re thinking about getting a personal loan, learn how they work before applying.

How Personal Loans Work Vs. Other Financing

Personal loans are usually a type of unsecured loan, meaning you aren’t required to offer collateral in case you don’t repay the loan. There’s nothing for a creditor to seize if you take out an unsecured loan and don’t repay it, but there are still consequences: Your credit score will plummet and your loan could go into default. Secured loans, on the other hand, require collateral, like your home in the case of a mortgage or your car in the case of an auto loan. If you don’t pay back your secured loan, the lender could seize your property.

Unsecured loans use your credit score and credit history to determine if you qualify. While home and auto loans require you to use those loans for specific purposes, personal loans don’t have the same requirements. Instead, you can use a personal loan for almost anything, as long as it’s within the terms outlined in your loan agreement.

Personal loans are awarded in a lump sum, and you make monthly payments until your loan is paid in full. This is different from credit cards, which are a type of revolving credit. Credit cards are used as needed up to a certain amount, or your credit line. As long as you make monthly payments, you can continue to spend what you’d like up to your limit.

6 Reasons for a Personal Loan

Personal loans can be used for practically any need you have—within reason and according to the terms of your loan. You can’t use the money for anything illegal, to gamble, or, in most cases, for postsecondary education expenses. Here are some good reasons to get a personal loan.

Emergency Cash Assistance

If you need money right away to cover bills, an emergency cost or something else that needs immediate attention, you can take out a personal loan. Most lenders provide online applications that allow you to learn whether you’ve been approved in minutes. You could receive funding that day or within a few business days, depending on your lender. You can use a personal loan to cover emergencies like:

Paying past-due home payments and utilities
Medical bills
Funeral expenses
An unexpected car repair

A personal loan is a good alternative to a payday loan. Payday loans are short-term, high-interest loans that usually require repayment when you receive your next paycheck. You typically won’t have to submit to a credit check, and you can get funding right away. But payday loans could do more harm than good. Interest rates may approach upwards of 400%, and many borrowers don’t have the funds to repay the loan in full as quickly as payday loans require.

Debt Consolidation

Americans owe $1 trillion in credit card debt. While some of that includes the purchases people made, it also includes interest and fees. All of this adds up and can hold many consumers back from paying off their credit card debt.

A personal loan can be used as a form of debt consolidation, especially with credit card debt. It’s also a popular reason people take out a personal loan. Personal loans charge lower interest rates compared to credit cards, particularly if you have good credit. The best personal loans charge an interest rate as low as 4%, well below the double-digit percentages most credit cards charge. You can take out a personal loan, pay off the balance of your outstanding credit cards and then make one payment to your new personal loan servicer.

Home Improvement and Repairs

If you own your home, you could take out a home equity loan to fix or make upgrades. But you can also take out a personal loan. Home equity loans and lines of credit are great for tackling home projects, but they’re secured and use your home as collateral. Also, keep in mind that some lenders have tightened HELOC lending requirements due to Covid-19.

If you don’t want to risk losing your home in case you fall behind on payments, a personal loan is a solid substitute. Along with that, it might be quicker to get a personal loan compared to a home equity loan.

Moving Costs

If you’re moving close to where you live now, you might not need to cover any major expenses. But if you’re moving out of state, you may need extra cash to pay for moving costs. Moving far away means covering the cost of packing up your belongings, possibly hiring movers and transporting your things to your new location.

A personal loan also can help fund the process of finding a new place to live. For instance, if you find an apartment, you might need to cover the costs of the first month, last month and a security deposit. You may also need some cash to furnish your new home.

Vehicle Financing

Auto loans are available if you’re looking to buy or lease a car, but personal loans are also available. Auto loans tend to have lower interest rates compared to personal loans, but they are secured loans and use your vehicle as collateral. If you’re worried about missing payments and your car getting repossessed, a personal loan might be a better option for you.

Wedding Expenses

We don’t recommend borrowing money to pay for a wedding. Instead, consider paring down your wants to fit your budget, rather than increase your budget to fit your wants.

But if you do need to borrow money, you have a few options, like credit cards and personal loans. Credit cards tend to have higher interest rates compared to personal loans. Taking out a cash advance on your credit card can have even higher interest rates and fees. A personal loan is a less expensive option for borrowing if you need the money to cover the cost of a wedding.

Source

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