Personal Loans: Why Should You Get One?
A personal loan is usually an unsecured loan, which means you don’t have to offer collateral. So, the lender will have nothing to seize should you default on the loan. However, we’re not encouraging you to default on personal loans since there are consequences of doing so.
One of these consequences affects your credit score. When you default on any loan, your credit score plummets and hurts your chances of getting another loan approved in the future. So, where can you use a personal loan? Personal loans are flexible and you can use them for various reasons, like covering an emergency fund or consolidating your loans.
Like any other type of installment loan, they are typically paid off with interest every month. But before we talk about the different reasons why you should take out a personal loan, let’s talk about the loan type in more detail.
How Do Personal Loans Work?
Different types of loans are earmarked for particular purchases. For example, a mortgage is for a house, auto loans for cars, and student loans for educational purposes. For loans like mortgages and auto loans, the brand new car and the house serve as respective collateral.
Mortgages and auto loans are secured loans because they require collateral. But not all loans require collateral and these loans are referred to as unsecured loans. Personal loans fall under this category.
A typical personal loan requires no collateral. This means that the lender takes a significant risk in the transaction. However, the interest rate is far higher and getting approval is more complex compared to a secured loan. Approval depends on several factors like your credit score, credit reports, and debt-to-income ratio. However, there are some types of personal loans that are secured.
Since personal loans can also be used to buy a property or a car, these purchases can serve as collateral when you default on the loan. However, in turn, the interest rate goes significantly lower and the approval is much easier.
Whether your personal loan is secured or unsecured, defaulting on them still has the same consequences. So why should you take out a personal loan? Here are some reasons.
Emergency Cash Assistance
If you’re in an emergency and require money immediately, personal loans are your solution. Most lenders nowadays offer online applications, making the application process very convenient. The application process is fast, especially if you already have the documents in hand.
The approval is quick as well and you can get the money as fast as the next day, or in some cases, several hours later. You may need emergency cash assistance for past-due rent, funeral expenses, medical expenses, or an unexpected car repair.
If you’re torn between getting a personal loan or a payday loan, here’s what you need to know. Payday loans are suitable for short-term cash assistance. Their deadline is usually within your next payday. However, the borrowing limit is much more limited compared to personal loans. Also, they have incredibly high interest rates. Personal loans are a type of instant installment loans, so payments usually are made monthly or bi-weekly.
One of the most common reasons people take out personal loans is to consolidate their debts. But what is debt consolidation?
Debt consolidation is taking all of your debts and putting them in a single account for easy payment and a lower interest rate. It makes the deadline of all the accounts uniform, and if you picked a personal loan with a low interest rate, you’d pay that instead of having to remember each accounts’ interest rate.
Home Repairs and Improvements
The most common financing strategy when it comes to home improvements is to take out a home equity loan. It’s the most logical move, especially if you already have equity in your own house. It can also be done if you want some repairs done. However, did you know you can also take out a personal loan for these reasons?
Home equity loans and line-of-credit loans take your house as collateral once you’re unable to pay. Unsecured personal loans don’t. So, instead of risking losing your house for a secured loan, why not take out a personal loan? Of course, we don’t necessarily mean that it’s okay to default on your personal loans. We’re saying that a personal loan is much less risky than an equity loan or a line of credit.
Personal loans are quick and easy to apply for, especially if you’re in an emergency or want to purchase something not too extravagant. However, remember that you must have an excellent credit score and spotless credit report to access personal loans because they are unsecured. Also, your interest rate and borrowing limit depend on these factors – so don’t forget that.