Are you considering whether to take out a personal loan? There are several advantages that personal loans have over credit cards and other types of debt. For starters, a personal loan is given based on an individual’s creditworthiness, or credit score, and often no more than that.
This means that self-employed individuals or students, those that may have a hard time documenting their income because they don’t have a steady paycheck, or they live primarily off of student loans, can still often qualify for personal loans. Also, personal loans don’t require any collateral or home equity, so they can be used for virtually any purpose and don’t require that the borrower own significant assets such as a home or a vehicle.
How to Decide If You Should Take Out a Personal Loan
Assuming that you are creditworthy enough for a bank (ex. ?Wells Fargo), credit union (ex. Navy Federal Credit Union), or online lender (ex. Prosper) to give you a personal loan, the question really becomes less of can you take out a loan and rather should you take out a loan.
Many people take out personal loans and spend them unwisely, in part because lenders don’t track how you spend the money they lend you. From a lender’s perspective, it is just as acceptable to spend your loan funds on a vacation as it is to spend them on home repairs. What you do with your money is, well, personal. The lender is only concerned with whether you repay your personal loan on time.
That said, there are really only a few good reasons to take out a personal loan. For most significant life expenses, specific types of loans are offered, often at better interest rates and at better terms than personal loans. For instance, if you need money to live off of while in college, you are likely to be better served by approaching your school’s financial aid office and requesting an increase in your student loan budget and corresponding loans.
Many schools will increase student budgets if the request is justified, and some schools offer in-school funded emergency loans at zero percent interest rates for a semester. If, on the other hand, you’re a homeowner who needs extra money for home repairs, or to build home improvements, it is likely that a home improvement loan secured by your property will give you better loan terms than simply taking out a personal loan. Generally speaking, loans that are secured by collateral offer better interest rates because the possibility of foreclosure or repossession offers the lender greater security and a recourse if the loan isn’t repaid.
So what are the really good reasons to take out a personal loan? One is to consolidate credit card debt or avoid high interest periods by taking out a debt consolidation loan. For instance, if you transferred several card balances to a new card that offered a 1% introductory interest rate for the first twelve months, but still have a significant balance left on it when the twelve months is almost over, it may be a smart financial move to take out a lower-interest personal loan and pay off that credit card balance.
Similar situations happen all the time with the purchase of furniture and large appliances. Often for such purchases, stores offer special “in house” financing or financing on a department store-issued credit card. These deals offer low or no interest financing periods, but some have a twist that throws in retroactive interest if the entire amount is not paid off within the special financing period.
In other words, if the zero percent interest period is only for the first six months, and the normal interest rate is 18%, a customer that doesn’t pay off all of the balance within six months may get a hefty hit on their statement when the company back-charges them 18% interest all the way back to the date the purchase was made. In situations such as these, a personal loan at a lower and set interest rate might just save the borrower a ton in finance fees and interest.
Another excellent reason to take out a personal loan is for necessary medical or dental expenses. In the end, it isn’t a wise move C financial or otherwise C to put off necessary health care for yourself or your loved ones. Whatever reasons you have for taking out a personal loan, be sure to shop around smartly for the most competitive rates and make your payments on time to avoid fees and late charges.
