There are several reasons why people choose to take a personal loan. It can be the solution to pay for some item you really want, like the holiday of your dreams or that fantasy honeymoon, perhaps for a new appliance, or to replace one that is broken. A personal loan can also be a life-saver when faced with emergency repairs or medical bills.
However, there are good and bad reasons for taking a personal loan, therefore it is a decision that needs the pros and cons to be carefully weighed. The key factors to consider are listed below.
Top Reasons People take Personal Loans
Buying a car can be costly but may become necessary due to the high costs of maintenance on an existing vehicle or needing a second car in a growing family. This is where a personal loan can help.
A personal loan is useful for home maintenance and upgrades. When taking a personal loan for these reasons, you will not be required to put your home up as equity. This is called an unsecured loan.
If you have several credit cards and other revolving debt, taking a personal loan makes sense. It allows you to consolidate all your debt into one monthly repayment. This is much simpler to keep track of. The amount will remain the same every month, so it is easy to budget for.
Sometimes, people are tempted to take short-term loans to deal with the period when they are waiting for a paycheck. Hence these loans are also called payday loans. However, the interest rates are far higher on these temporary loans than taking a personal loan. Payday loans also have to be repaid over a much shorter time, usually within one month or less.
Being hit with an emergency medical bill can find you unprepared. A personal loan provides a cost-effective option. Other costly procedures, like dental surgery, would also fall into this category.
Sometimes you want to purchase an item that is expensive or pay for a special holiday, like an engagement ring and honeymoon, and your savings won’t cover it. A personal loan usually works out cheaper than using a credit card.
Funerals catch people off guard. Especially if the death involved a much younger person who did not take out insurance. A personal loan can come in handy to pay for catering, flowers, and other items that might be needed without warning.
Advantages of Taking a Personal Loan
There are numerous benefits to taking a personal loan.
One of the best reasons for taking a personal loan is to consolidate all your debt into one monthly repayment. And the interest rate will work out lower than what you were paying across several credit cards. It is also cheaper than taking a payday loan and has the further advantage of giving you longer to make the repayment.
Did you know that getting a personal loan can increase your credit score?
There are three things you can do to get yourself a better rating. As long as you pay the full amount on time, this will raise your rating. Your credit utilization score drops, and your credit score goes up when you replace revolving credit, such as credit cards, with a personal loan. Finally, if you have a mixture of types of credit, such as a personal loan and revolving credit, your score increases.
Personal loans generally have a lower interest rate than other lines of credit. Reducing your debt through consolidation and replacing your credit can both be achieved by taking a personal loan. Aside from the benefit of smaller interest rates, personal loans have fixed repayment amounts so that you don’t have to pay fluctuating amounts from month to month.
This blog post from Tally has more information on personal loans and their benefits. Tally is a helpful app that lets you reduce your credit card debt. If you are eligible, you can even access a line of credit to consolidate existing debts.
Disadvantages of Taking a Personal Loan
You need to be aware that doing a credit check inquiry for a personal loan will result in a hard inquiry being performed. This happens every time you make such an inquiry (but not when a check is done to see if you prequalify for a loan). You should still be able to make multiple applications to compare rates for one loan without it affecting your credit score, as long as this is within a period that varies from two weeks to six weeks.
If you default on your payments due to insufficient funds, then a personal loan is not for you. Doing so also has a negative effect on your credit score. It may result in applications being declined or personal loans being offered at a much higher interest rate. In this case, the comparison between different credit options may no longer favor a personal loan.
Similarly, if you are not able to afford to repay a loan, it is better not to take it in the first place. Far better to start a monthly savings account. You may be required to deposit a small set amount into the savings account, but you will earn interest on it. When you have saved up enough you can use that money on the item you wanted without having to get into debt.
Loans come with other costs apart from interest. Make sure that the loan amount you request takes this into account. You could ask for slightly more on the personal loan to cover these costs.
The advantages of taking a personal loan generally outweigh the negative reasons for not taking one. As long as you are a good payer who is always on time and you can ensure that the full installment is paid every month, then you are a good candidate for a personal loan. You can even reduce the amount of interest you are currently paying, improve your credit rating, and have only one account to manage.