We all dream to live in a world where we have enough money to pay for everything. In reality, people often face unforeseen expenses that unsettle them and require them to take immediate action and borrow some funds.
Taking out personal loans can be expensive but they may also be a suitable solution in some cases. You may utilize this loan for a variety of needs and purposes. Keep on reading to find out how personal loans work and when it is a good idea to obtain one.
How Personal Loans Work
There is a wide range of lending solutions available to consumers today. People may take out personal loans, mortgages, student loans, auto loans, or use instant cash apps. Mortgages are used for buying a house, car loans are used for buying an auto, best cash advance app can lend you money in a few minutes, while student loans give you an opportunity to get higher education.
Each type of loan serves a particular purpose and often requires collateral to secure the debt. Your home becomes collateral when you obtain a mortgage while your car becomes collateral if you receive an auto loan.
Personal loans, on the contrary, don’t demand any collateral. They are called unsecured lending solutions as you aren’t required to provide any valuable asset in the form of a guarantee. In this case, crediting companies face more risks of you default so the interest rates can often be higher compared to secured solutions. While getting a personal loan may not be the cheapest option, it’s still a smart solution for a variety of situations.
When Is It a Good Idea to Request a Personal Loan?
Before you decide whether this lending solution is necessary for you and will serve your current money needs, you need to consider the following reasons for obtaining a personal loan:
- You urgently need money
- You don’t have a low-interest credit card
- You don’t have collateral to secure the debt
- This is the cheapest lending solution.
Getting a personal loan may help you fund your immediate cash need and boost your money potential but this is a short-term lending solution that is usually issued for a few months. Traditional banks may offer a larger amount for a longer period but they have strict eligibility criteria so not many consumers can meet those demands. Here is when it is profitable to take out a loan:
Repay Other High-Interest Debt
While a personal loan may not be the cheapest solution, it can help you repay existing high-interest debt. Maybe you’ve already obtained a payday loan or any other debt with sky-high fees and rates because you urgently needed some money and couldn’t qualify for alternative options. Many consumers utilize a personal loan as a suitable solution to pay this debt off with lower rates.
Consolidate Credit Card Debt
Many credit cards often come with expensive fees and rates. If a client owes a high balance on one or several credit cards, he may save cash by getting a loan to consolidate this debt. According to the Federal Reserve, the average interest rate on a credit card is 19.49%. The interest rates on personal loans are generally lower and are estimated at 9.41%.
Fund an Expensive Purchase or Home Improvement
Do you urgently need to make a big-ticket purchase? Sometimes, we may need a new appliance or a piece of furniture that has broken down. Otherwise, you may also need to finance a home renovation project to repair the leaking pipes, install a new furnace, etc.
It may not be wise to postpone this decision as to the more you wait the more expensive the final repair will be. So, it pays to take action and request a personal loan to fund your immediate needs. It is often cheaper than using a credit card.
Top Rules to Follow When You Request a Loan
#1 Borrow the Amount You Can Pay Off
Some borrowers are tempted to request a larger sum than they really need right now especially if the lender allows you to borrow it. However, financial coaches recommend consumers to obtain only the amount they actually need to cover urgent expenses.
If you borrow more than you can afford to repay you will most likely end up having issues with debt repayment and may even default on the loan. This is the most important rule of borrowing funds.
#2 Choose a Shorter Repayment Term
You need to select the shortest repayment term so that you can become financially independent again soon. Don’t opt for long-term lending solutions unless it’s a mortgage or a student loan. Taking out a personal loan should only serve your short-term money needs and it has to be repaid on time.
#3 Always Make Regular Loan Payments
Your aim is to be a disciplined and responsible borrower. When you request a personal loan even for a small sum, lenders will take into account how well you cope with timely payments. If you make regular payments and repay the debt on time, it won’t have a negative impact on your credit history and credit rating.
Otherwise, failing to make regular loan payments may destroy your credit history and lower your ability to qualify for other crediting solutions in the future.
In conclusion, you may experience temporary issues with personal finances and think about getting a small loan. This situation needs to be considered from both sides as the sum you request isn’t given to you for granted.
Each loan has to be returned according to the repayment schedule together with the interest rates and any other applicable fees. You should be a responsible borrower and take out a loan only if you have an emergency and don’t have enough savings to cover immediate costs.
Consider the pros and cons of this decision before you sign the agreement for a personal loan. If you think that this is a reasonable solution, pay attention to the top rules to follow when you request a loan.