Personal loans are one of the most versatile of the other debts that you can borrow – apart from credit card debts. You can use it for just about anything. Of course, this freedom will have to be done with a lot of thought and calculations. It may be empowering to have all that extra cash but debt should always be treated with caution. You need to borrow wisely because debt, if used well, can help improve your financial situation. But if you abuse it, you may as well say goodbye to the financial stability that you already have.
It seems that there is an increasing demand for this type of loan. At least, this is according to the data combined by Forbes. The article mentioned a Bankrate survey that revealed how 1 out of 10 consumers planned to borrow a personal loan in the coming 12 months. 18% of these people are Millennials. A separate study, this time, done by TransUnion, revealed that borrowers of personal loans will rise in 2016. The estimation is a 5% increase. The same credit bureau estimated that 13.7 million Americans have a personal loan in 2015. They revealed that this is a popular type of loan for those who have a good credit standing and a stable income.
What are the different uses for personal loans
But how can you use personal loans to your advantage? There are three simple, yet powerful ways that this type of loan can help you out.
Pay off debt.
One of the best uses of this loan is to pay off credit card debt. To be more specific, it is used to consolidate multiple credit card accounts. Sometimes, a simple restructuring of debts will help you get ahead of your debt payments. When you borrow the personal loan, you can use it to complete pay off your balance. That would eliminate your high-interest credit card debts and will allow you to simplify your debt payments. You can concentrate on other things without worrying about missing out on any payment. Since a personal loan is usually paid a fixed amount, you can set up an auto-debit so you can eliminate the chance of being late. Some banks could even give you an incentive for this – like a reduction in an already low-interest rate.
It may not be believable to use debt to save money. However, this is possible. The best illustration is when you pay off your debts – specifically the high-interest credit card debts. If you have a good credit score, your personal loans can be borrowed with a very low-interest rate. Changing the high-interest credit card with a low-interest personal loan will save you money.
Since it is easier to pay off your debt, the chances of you giving a good payment behavior will be more likely to happen. Not only that, the different types of credit in your credit report will give your score a boost. You have a personal loan and credit card debt. The presence of your revolving and installment debts is a good sign that you can handle different kinds of debts. If you pay it off properly, it will have a better impact on your credit report.
Using personal loans properly
Some people say that using personal loans for emergencies is also a smart way to use it. According to CNBC.com, a lot of people are using unsecured personal loans to help them with emergency expenses. Around 13.72 million of consumers borrowed personal loans in 2015. This was an increase from the 10.57 million back in 2013. It is expected that 24 million Americans will borrow this type of loan this year – for emergency expenses.
While using personal loans for emergency expenses seems like a good idea, there are better ways to prepare for it. You can save up for unexpected expenses. Instead of using debt to pay it off, it is better for you to save up for a cash reserve. In case that cash reserve runs dry, that is the only time that debt can be used to support your emergency expense.
Of course, there are other ways for you to utilize your personal loan. Here are some of them.
- For renovation purposes. Whether it is inside, outside or within the perimeter of your house, a personal loan can help you shoulder this expense.
- For energy-efficient appliances. This may seem off but you will save a lot if you start using energy-efficient equipment and appliances. It is better to enjoy the savings while paying off the loan.
- For your vehicle. If your car needs the be repaired or maintained, you can use a personal loan to cover the expense.
- For celebrations. This has to be given much thought but if it is a one-time event and will not require you to borrow a huge amount of money, then it should be okay. Just make sure you can commit to the payments and you will not compromise your finances for it.
Important rules about using personal loans
When borrowing any kind of debt, it is important for you to follow a couple of rules to make it worth your while. Personal loans may be the least harmful because of the interest rate and the amount that you will borrow. However, you still need to approach it with caution.
Know the reason for the loan.
When you know the reason why you are borrowing you can easily decide if you are making a smart move or not. We have enumerated the smart ways you can use this loan. If it is not one of the items on the list, you need to think carefully if your reason to borrow is worth being in debt for.
Have a payment plan before you borrow.
You should also know where you will get the money to pay for the loan. Will it come from your income? If yes, will it require you to sacrifice an expense? You need to think about the payment plan so you can immediately pay off the loan once it enters repayment.
Do the math.
According to Bankrate, the average interest rate for personal loans is around 9%. This is expected to rise because the Federal Reserve increased their rates this year. You need to ensure that the cost of borrowing will be worth it in the end.
Make sure it is aligned with your financial goals.
You should also consider aligning your reason to borrow with your financial goals. If it will not really contribute to your targets, then you need to think twice about borrowing money. But then again, if it will make your life easier, it may be justifiable to borrow money.
Watch out for prepayment penalties.
Some personal loans will charge you with prepayment penalties. As much as possible, you have to avoid these type of loans. You want the loan to give you flexibility in terms of repayments. If there is no prepayment charge, you can make a lump sum payment whenever you have the money. This will help you save on the interest.
Be careful of scams.
When borrowing personal loans, you need to ensure that you are borrowing from legitimate companies only. If a company offers a too-good-to-be-true loan term, it might be a scam. Check with the Better Business Bureau before you give a company your details.
Here is a video that discusses the benefits of using personal loans.
Common questions about personal loans
Question: Who needs personal loans?
Answer: People who need cash that cannot wait until the next payday are usually the people who need personal loans. It can be used to pay for an emergency, a home renovation, or even in the purchase of an expensive item.
Question: What type of personal loan should I get?
Answer: There are many ways to define a personal loan. It can be defined according to its purpose. For instance, a car loan is actually a type of personal loan. On the other hand, you can also categorize personal loans according to their interest rates. You can choose a fixed rate or a variable type of loan – depending on the interest rate that you think suits your payment capabilities.
Question: When do personal loan repayments start?
Answer: Most of the time, personal loan repayments begin after it is disbursed. In fact, some personal loans are given with a deduction because the lender already got your first payment and the fees associated with the approval of the loan.
Question: Why do banks reject personal loans?
Answer: The main reason for banks to reject your loan is because they believe you cannot be trusted to pay it back. It can be because you lack the documents to support that you can pay back the loan. It can also be because you already have a lot of loans, to begin with. Sometimes, a bad credit score can keep you from getting a personal loan approval.
Question: Are personal loans good for your credit report?
Answer: That depends. If you pay back your loan properly, it can do your credit report some good. It will show that you can pay this type of loan responsible. However, if you fail to pay it back, then it will bring your credit report to ruin.