Personal loans are different from mortgages, credit cards, and other types of credit. While a mortgage loan secures a home and an auto loan secures a vehicle, a personal loan can be used for a wider range of reasons. Personal loans can finance large purchases, cover unexpected expenses, or even pay for home remodeling projects.
There are a number of times in life when you may find yourself considering a personal loan. Personal loans can be very useful in a variety of situations, but it’s important not to use any kind of credit or loan in a frivolous manner.
Below, you’ll find some of the best, most reasonable uses for personal loans:
Credit cards and other lines of credit can have very high interest rates, meaning you might be paying more to use that line of credit over the life of the repayment process. Debt consolidation through a personal loan can give you the tools to pay off outstanding high-interest balances faster and for less money.
Consolidating debt by paying off these balances with a personal loan can help you make the most of your monthly budget.
Personal loans often have much lower interest rates than credit cards. This means your monthly personal loan payment could be lower than a credit card payment because the interest rate is lower.
However, paying off a credit card is not an invitation to go out and spend more. Debt consolidation only works if you stop accruing charges.
Plus, personal loans are installment loans. This means that each monthly payment is always the same. There are no surprises or minimum payments, making it easier to budget the payment every month.
Nothing can derail your budget faster than an unexpected expense. Car repairs, home repairs, and even becoming the victim of a criminal act can all result in unpredicted costs from your monthly income.
A personal loan can help you cover these expenses without too much undue stress. As long as you can afford the monthly payment and have qualifying credit, you should be able to use a personal loan to defray unexpected costs.
Some items that are necessary for everyday life can carry big price tags. A new refrigerator can sell for $1,000 or more, with other kitchen appliance price tags running at several hundred to several thousand each.
Furniture for a new home, a new bed, or new carpeting can also be expensive. A personal loan can be used for any of these large purchases, and many others. When using a personal loan for a large purchase, make sure the loan payment fits easily into your budget.
Your credit score is based on several different factors. One of these is your “credit mix.” The different types of credit for which you have been approved can impact how good your credit score is.
It’s important to have different kinds of credit instruments, including revolving credit, like credit cards, and installment loans, like personal loans. The more diverse your credit types, the more worthy of credit you may appear to lenders.
The most important thing to remember about getting a personal loan is that the money must be repaid. Most personal loans don’t require collateral, so the lender is relying almost solely on your credit score and history to determine your creditworthiness.
Personal loans can be an excellent tool to help you accomplish a lot of goals, but using them frivolously could result in not having access to a line of credit when you need it most.
Be responsible about your personal loans and any other credit instruments; make sure you have the financial wherewithal to repay your loan in a timely manner and you’ll see your goals accomplished and a higher credit score to boot.