Saving up for big expenses doesn’t come easy for everyone, especially when you don’t earn so much. Even when you’re not so wealthy, having your dream house, a fancy car, and a vacation in the Maldives are great things to have an eye on. It can take years to save up for such items, and when you finally have enough, the time may not be right anymore. Things change.
Sometimes, you need a massive sum of money to settle an immediate need. Applying for personal loans becomes one of the best ways to achieve your desires just when you want them. But some people are averse to taking loans. They rather use credit cards. So when does a personal loan make sense?
What is a Personal Loan?
A personal loan (PL) is a kind of loan you can use for just about anything. Your lender wouldn’t necessarily ask you what you want to use it for. All they want to know is if you can pay it back without the specified time. It’s unlike a mortgage that’s specifically for real estate or business loans that must go into business development. You decide what you want to use a PL for.
PLs are usually less expensive than credit cards and are not secured by collateral. This makes it a good choice for some people.
However, a PL is often more expensive than other lending options, such as mortgages and car loans. That’s because the lender is taking a greater risk as they’re not demanding collateral. But there are also secured personal loans where collateral is involved. Notwithstanding, your interest rate will typically vary according to your credit score and debt-to-income ratio.
Specific Reasons to Consider a Personal Loan
- The PL is your least expensive option that can cover that immediate need.
- The credit limit on your card is not enough to settle that immediate need.
- You don’t qualify for a low-interest credit card.
- You have no acceptable collateral.
Other Instances where Personal Loans Make Sense
- Paying off your credit card debt
You can use a PL to pay off a substantial debt you own on one or more credit cards. The average interest rate on a credit card is 19.49%, while a PL is 9.41%. So you’d be saving money.
- Funding a big purchase or major life event
You may intend to sell or remodel your home. Home improvements are expensive but add considerable value to the property. You can use a PL to foot the costs and payback with the profit made on the home sale.
You can also take a loan when you want to furnish your home, go on a vacation, or finance an expensive event such as a wedding.
- Increasing your credit score
Paying back your credit card debts on time will improve your credit score. But if timely payments become a challenge, your credit score will drop. You can obtain a PL to pay off credit card debt so as to maintain or improve your credit score.
Although there are multiple funding options, sometimes, a personal loan is just the most efficient choice. To be safe, do your due diligence before applying for any credit and be sure you can pay back on time.