Have you been considering if you should apply for a personal loan? If so, you’re not alone. Borrowing money can be confusing and overwhelming at times. A lot of people wonder where to begin or if their credit score will be high enough to get the funds they need. Our goal is to make the process as simple as possible. Let us do the hard work for you.
People turn to personal loans for a large number of reasons because they help cover costs for things we need or want but may not have the cash readily available for. However, not every need or want is worthy of taking out a personal loan. While each person will have their own unique reasons for taking out a personal loan, we can go over a few common scenarios to give you an idea of cases when they totally make sense.
Here are 5 common reasons people take out a personal loan.
1. Debt Consolidation
One of the most popular reasons people decide to take out a personal loan is for debt consolidation. If you have multiple credit lines, you are a candidate for this type of scenario too. Debt consolidation is common because it allows you to combine all or most of your debt into one simple payment. This is particularly helpful if your credit lines have high-interest rates. By conjoining a number of your debts into one simple payment, you can streamline your finances and potentially save money on interest. In that case, it’s a no-brainer why so many people decide to go this route.
In U.S. households, the percentage of revolving credit card debt increased to 43% in 2020, up from 37% in 2019.
2. Emergency Expenses
Wouldn’t it be nice if we could plan for emergencies? You can to an extent, but they are emergencies after all, so the timing and amount needed are totally unexpected. Less than half of Americans say they could handle a $1,000 emergency, such as a car repair or medical bill, by using their savings. Of course, many emergencies cost even more than that. The approval process is pretty quick and depending on the lender, a personal loan can have those funds in your bank account within a week or so. Other unplanned expenses than can pop up might include funeral expenses or past-due home payments and utilities.
In most cases, taking out a personal loan is a better option than a payday loan. Payday loans can come with very high-interest rates and a short turnaround time, usually requiring that you pay them back with your next paycheck. Most Americans can’t go without one of their paychecks, which can create an ongoing cycle of debt in a lot of cases. Lenders for a personal loan will require a little more background checking, but it will be worth it in the long run.
3. Moving Costs or Home Improvements
Depending on the situation, moving costs can add up quickly, especially when you are moving out of state. You may need to hire the help of movers, cover the cost of transporting your items, and so many other little things you might not think of, such as new furniture or security deposits for utilities. A personal loan can help soften the blow of so many expenses all at once. A personal loan can give you the ability to wrap all those expenses into one payment and pay it off in increments that are much more manageable.
Keeping up a home, in general, can be costly. Unexpected home repairs are another top reason for taking out a personal loan. If you have a major plumbing issue or need a new roof before the rainy season hits, a personal can get you the funds you need in a short amount of time. If you have been a homeowner for a good amount of time, you may have equity in your own, in which case you have the option of taking out a Home Equity Line of Credit (HELOC). Home equity loans typically have a lower interest rate because they are secured loans using your home as collateral. Again, each situation is unique so you’ll need to consider your own financial situation and weigh the costs vs. rewards to see what makes sense for you.
4. Important Life Events
Most of us like to celebrate major life events such as weddings (obviously!), anniversaries, and milestone birthdays. It may come about that you find yourself in charge of planning your parent’s 30th wedding anniversary, or maybe you want to give your child the 16th birthday of their dreams. If you have ever planned an event such as this, you are quite aware of how quickly those costs can add up. In a perfect world, our parents would have saved for years to give us a beautiful wedding, but most often, this is not the case.
If event costs are not split between multiple people, it can be a heavy burden to carry. That being said, if taking out a loan to cover the costs of an event is going to stretch you thin, we would advise you to rethink. It’s important to stay within your means, so you don’t put yourself in a bad financial situation. Consider all options such as cutting back on decorations, using credit cards, or asking family members to pitch in. Remember to only borrow what you know you can payback.
5. Vehicle Financing
Purchasing a vehicle such as a car, boat, or RV is another big reason people turn to personal loans. It can make life a lot easier if you know how much you are shopping with before you start looking. Not only does it help narrow down the search, but it allows you to plan better all around. Before you get tempted with the latest and greatest models, you can evaluate your finances first to see what monthly payment makes the most sense for you. In addition, you are in a better place for negotiating when you already have the funds in the bank.
This is particularly helpful if you are buying a vehicle from a private person who could not offer you financing. If you are purchasing from a dealer, you might be able to get a better interest rate with one of their lenders because those funds are usually secured by the vehicle itself. Personal loans are not a one-size-fits-all type of financing, but it’s worth considering for any large purchase.
When Personal Loans Don’t Make Sense
As we mentioned, there are many things to consider before taking out a personal loan. Sometimes you are able to acquire financing at a better rate, in which case any financial advisor would recommend that you borrow money from the source that costs the least. No one wants to pay more than they have to.
If you need to borrow money for tuition expenses, you will likely find a better deal with a dedicated student loan servicer. The standard interest rate for student loans, both private and government-backed, are usually much lower than a personal loan. In addition, student loans typically don’t require payment until after you have finished with school, whereas a personal loan will want the first payment within a month of being approved.
Another time you may want to pass on a personal loan is for vacations. With the exception of huge life events such as a honeymoon or a newly retired getaway, most experts agree that you shouldn’t borrow money for regular vacations. Instead, you should set money aside throughout the year or scale down your vacay to a more manageable level. If money isn’t flowing, you may need to drive instead of fly, but your finances will thank you later.
There are a lot of reasons someone might decide to take out a personal loan. Every situation is different, so it’s important to evaluate your own personal finances before getting in over your head. If you need extra cash in your bank account fast, and you know you have the ability to pay it back within a certain amount of time, a personal loan can be a good option to achieve your goals.
Lenders will be looking for specific characteristics to show you are creditworthy. Don’t let the application process intimidate you. We can help you get your ducks in a row and obtain the funding you need in a short amount of time. Contact us today to get started!