For just about anything, a personal loan can be used. Some lenders might ask what you’re going to do with the money, while others just want to make sure you’re able to pay it back. Although personal loans are not cheap, in a number of cases, they can be a viable option. If one is right for you, here’s how to decide.
Are Personal Loans Good Ideas?
For a particular transaction, certain kinds of loans are earmarked. With a mortgage, you can purchase a home, buy a car with a car loan, and pay for college with a student loan. Your house, with a mortgage, serves as collateral. Similarly, the car you’re buying for an auto loan would be the collateral.
Yet a personal loan also doesn’t have any collateral. The lender takes a greater risk and would more likely charge you a higher interest rate than it will for a mortgage or car loan because it is unsecured by property that the lender could seize if you default on the loan. A variety of variables, including your credit score and debt-to-income ratio, will depend on just how high your rate would be.
Of course, even with an unsecured personal loan, failing to make timely payments can be detrimental to your credit score and significantly restrict your ability in the future to receive credit. The company behind the most commonly used credit score, FICO, says that the single most significant element in its formula is your payment history, accounting for 35% of your credit score.
When to Take a Personal Loans?
If you need to borrow for a reasonably short and well-defined time span, you could also suggest a personal loan. For example, if you have a lump sum of money due to you in two years, but not enough cash flow in the meantime, a two-year personal loan might be a way to bridge the gap. Personal loans usually range from 12 to 60 months.
Consolidating Credit Card Debt
Paying Off Other High-Interest Debts
Financing a Home Improvement or Big Purchase
Paying for a Major Life Event
Improving Your Credit Score
Personal loans, under the correct conditions, may be useful. But they’re not inexpensive, and better alternatives are often available.
We hope that the provided information has been of help to you. Do leave a comment below if you have anything to add to this and we will get back to you as soon as possible.