Top 5 reasons for taking out personal loans
Personal loans can be a very useful tool in your financial toolbox. They can be used for consolidating debt or to fulfil dreams like a wonderful wedding or that long dreamed of Pacific Island holiday. However, before running into a bank or clicking the button online to take out a personal loan, you need to make sure you fully understand how personal loans work and whether one is a wise choice for and where you are in your life right now.
Personal loans are generally unsecured loans, meaning you’re not required to put up collateral to take one out as you would with secured loans, such as a mortgage or car loan. Failure to repay a secured loan could lead to the seizure that property.
Personal loans are awarded in a lump sum, and you make monthly payments until your loan is paid in full. With fixed interest rates and structured repayment terms, you can budget effectively to avoid nasty financial surprises.
Flexible and accessible
Qualifying for an unsecured loan, like a personal loan, depends on your credit score and history. This makes them reasonably accessible. Because of the flexibility they offer, personal loans are often used for emergency expenses, debt consolidation, home improvements, or even those ‘big ticket’ purchases.
A personal loan can be used for just about anything, as long as it’s within the terms outlined in your loan agreement. Some lenders may ask what you plan to do with the money, while others will just want to be certain that you have the ability to pay it back.
However, if don’t maintain repayments, your credit score will plummet, and your loan could go into default.
Most common reasons for taking out a personal loan
1. Debt consolidation
The most frequent use of a personal loan is to consolidate debt. Combining multiple balances of things like credit cards debt or buy now pay later debt into a single loan with a fixed interest rate and predictable monthly payments can potentially save loads on interest charges and simplify repayments.
2. Emergency cash assistance
When faced with urgent bills such as medical bills, overdue utilities, tax payments or unexpected car repairs, a personal loan provides quick access to funds without the exorbitant interest rates associated with payday loans. Personal loans also offer a more manageable repayment structure.
3. Home improvement and repairs
While home loans or mortgages are most often used for funding home projects, personal loans can be a viable alternative, especially for people who prefer not to use their home as collateral or do not sufficient equity. A personal loan means can tackle renovations or repairs promptly, with less paperwork hassle and quicker turnaround times.
4. Vehicle financing
Car loans are tailored specifically for vehicle purchases, and may offer lower interest rates, but personal loans offer another option. They are usually more flexible and have a simpler application process. With no down payment or collateral required, personal loans can be an appealing choice for financing vehicles such as bikes, boats, or campervans.
5. Weddings and holidays
Though borrowing for a wedding or a vacation is not ideal, personal loans can help cover significant costs, so people don’t have to resort to high-interest credit cards. A personal loan allows you to can prepay for expenses such as hotels, flights, catering and activities and means you can keep better track of your spending. When you take the loan out, you’ll know exactly when it needs to be paid off, how much your monthly or weekly repayments are and how much the total loan will cost you. Therefore, you may be less likely to keep mindlessly spending as you go, as can happen with credit cards, and then paying it off potentially over many years.
Reasons to be careful about loans
While personal loans offer numerous benefits, there are situations where borrowing may not be advisable:
Financial strain
If you’re already struggling to meet financial obligations, taking on additional debt through a personal loan may make your situation even harder. If you’re unable to afford the monthly payments or if borrowing isn’t essential, it’s wise to reconsider taking out a personal loan.
Non-essential expenses
Avoid using personal loans for discretionary purchases that can wait until you’ve built up sufficient savings. You should carefully evaluate your immediate needs, your financial priorities and whether the expense is justified now.
Be fully informed
Before committing to a personal loan, you need to make a fully informed choice. You should carefully assess your financial situation and carry out thorough research. You may like to explore other financing avenues, such as a mortgage for home improvements or a car loan for vehicle purchases. These may offer better terms or lower interest rates.
You need to always bear in mind that, if you decide to take out a personal loan and then your income takes a hit, or a financial emergency crops up, you might not be able to make your loan payments as originally planned. This could make your financial situation quite uncomfortable.
