Should I get a personal loan? Well, they are relatively easy and quick to get. And there are no restrictions on what you can use the funds for. While this is great for anyone who needs funds in a hurry, it’s easy to misuse this type of loan.
Many people take personal loans to fund luxury vacations or the latest tech gadgets. If you’re not careful, taking personal loans for non-essential items could push you into a debt-trap. You could end up paying for that vacation for the next few years. And you’ll pay hundreds or thousands of dollars over what you borrowed in accrued interest.
Here’s a look at some circumstances when it’s worth taking a personal loan.
The interest rates on personal loans is higher than some types of debts but not all. For example, personal loans have lower interest rates than credit card debt or payday loans.
Check the current personal loan interest rates. Then check the interest rates on your existing loans and credit cards. If the personal loan rate is lower, you could save a lot of money by taking a lower-interest personal loan to pay off the higher-interest debts.
Before doing this, the one thing you must check is if there is a prepayment penalty on your current debt. Replacing your current debts with a personal loan may not be a good idea if it has a high prepayment penalty. The penalty fee could wipe out any potential savings.
Keeping track of multiple payment amounts and due dates every month can be overwhelming. It also increases the risk of missed payments and default. Debt consolidation is one solution if you’re struggling to manage multiple debts.
With debt consolidation, you apply for a personal loan and use the funds to pay off other loans or credit cards. This combines the outstanding balances from multiple debts into one monthly payment, making it easier to manage.
When using a personal loan for debt consolidation, it makes sense to choose only those loans that have a higher interest rate than the personal loan rate. You don’t want to use high-interest personal loan to pay off your low-interest loans.
By their very nature, emergencies arise when you least expect them regardless of your financial circumstances. This is why it is so important to start building your emergency fund early. That way, when an emergency does arise, you have at least some funds readily available.
But not everybody has a large enough emergency fund to cover the emergency. Some may not have an emergency fund at all. In either case, a personal loan can be a life-saver. What makes personal loans especially useful in an emergency is that they are processed quickly, and the funds are disbursed immediately. You don’t have to wait days or weeks.
A vehicle is not a luxury item, it’s a necessity. If you don’t have one and can’t afford to buy it on your own, taking a personal loan can help. It’s far better than emptying out your savings account or dipping into your emergency fund.
Is it worth paying interest on a personal loan to buy a vehicle? Maybe not if you’re looking to buy a second or third vehicle. Or if you want to purchase a luxury top-end vehicle. But it’s definitely worth it to buy your primary vehicle for convenience that it affords.
Home repairs are another major expense that most homeowners face some time or the other. Some repairs such as a damaged roof, broken plumbing, or old wiring cannot be postponed indefinitely. Neglecting these issues can result in more expensive repairs down the line. Even worse, they pose a risk to you and your family. No matter how much it costs, some home repairs need to be attended to urgently.
A personal loan can help you get the funds you need for home repairs if you don’t have equity in your home. Or if you don’t like the idea of getting a home equity loan, which requires you to use your home as collateral. Personal loans are unsecured so the question of putting up your home as collateral doesn’t arise.
Some household appliances such as a washing machine or refrigerator are indispensable. If you don’t have the funds to buy an essential household appliance outright, a personal loan can help. Yes, you’ll need to pay an upfront fee and interest to get a personal loan but it’s worth it. You’ll still save money in the long run as you won’t need to resort to other expensive short-term alternatives.
Because personal loans are unsecured and so easily accessible, it’s easy to get tempted to apply for them anytime you need additional funds. Ask yourself these questions before taking out a personal loan.
The answers to these questions will help you make more informed borrowing decisions.
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