If you find yourself strapped for cash, you may wish to take out a personal loan to help you make ends meet. A personal loan is typically easier and quicker to take out than via other means, such as a home equity loan. Whether you could personally benefit from a personal loan, however, is a matter of your current financial situation and what you would seek to do with it.
Understanding the drawbacks
Unlike a credit card, a personal loan must be paid off in a fixed amount of time. Typically, the size of the loan you can obtain and its interest rate will be determined by your credit score. Thus, before you take out such a loan, always ensure you can afford to repay it in the specified time.
“Because a personal loan is not secured by any property, if you don’t pay back the loan, the lender could take you to court and sue you,” warns Diane Moogalian, vice president of operations for Equifax Personal Solutions.
On the upside, if you can afford to take out a personal loan, there are many positive and useful ways you can use it.
Among the most common uses of a personal loan is to combine other debts, including credit card debt and car loans. Consolidating all of your debt into a single loan with a fixed rate, fixed monthly payment and closed-end term not only makes your debt easier to manage but may even help you save money in the long term, according to Mike Osborn, chief marketing officer at Upstart, a personal loan company based in San Carlos, CA.
“For some consumers, they’re not paying as much to service the debt. For others, it means a lower monthly payment that they’re able to stretch out over a longer time so they can repay that debt within the means they have available,” Osborn says.
Making home improvements
You probably have a couple of home improvement dreams that have been too expensive to bring to reality. If you are a longtime homeowner with lots of equity in the property, you may prefer to take out a home equity loan or line of credit (HELOC) to finally fund that backyard swimming pool or gourmet kitchen; however, new homeowners who do not feel comfortable betting the house may be better off with a personal loan.
“A personal loan lets you make improvements to your home (up to the amount of the loan), regardless of how much equity you have,” writes Elissa Bass in a 2016 article for WisePiggy, an online personal finance resource. “Interest rates for home equity loans and HELOCs are based on the amount of money you borrow. If you're borrowing only a small amount, you may be able to get a better rate with a personal loan.”
Buying a motor vehicle
While most people buy cars or other motorized vehicles with cash or a secure loan, which generally have lower interest rates than personal loans, you may still benefit from the latter in some cases.
“People who can’t get a secured loan, perhaps because their credit history is too short to generate a FICO score, can use a personal loan to buy [a car, boat or recreational vehicle] or other assets,” writes Marcie Geffner, a Bankrate.com contributing reporter.
Other uses for a personal loan include unconventional mobility purchases, such as buying a motorcycle, snowmobile or even a horse, along with all associated equipment.
Covering emergency funds
Because personal loans are easier and faster to take out—you may sometimes be able to apply online and obtain funds as early as the following day—they can prove very handy in emergency situations, such as when facing sudden medical, funeral or home repair expenses.
“Funerals can be quite costly, depending on the type of casket and other services that are purchased,” writes Geffner. “If a deceased person’s estate can’t afford these expenses, a family member or other person can get a personal loan to cover the deceased’s final costs.”
Personal loans can also be used to help you pay for big events in the short- to medium-term, such as a dream vacation or wedding. It can even help cover the extensive costs of adopting a child.
“Nearly all lenders who provide adoption loans require good credit scores,” Bass says. “And pretty much across the board, the lenders advise not to use a credit card to fund an adoption. Using a personal loan, with a set interest rate and a schedule for repayment, makes better sense than the ups and downs of credit cards’ variable interest.”
Knowing when to take out personal loans can prove to be a strong asset in your financial toolbox thanks to their wide range of uses. Before you do, however, make sure to consult your financial institution first to get a better sense of all the possible benefits and drawbacks.