Personal loans have quickly become an indispensable means of financing for individuals to meet expenses that cannot be covered with credit cards, overdrafts or savings accounts. A personal loan is provided by a financial institution with an agreed-upon fixed interest rate for an agreed duration period. Personal loans provide funds for any one-off expenses such as marriage, education or home renovation costs. You could even use it to consolidate other personal loans or invest in your business venture. Are personal loans the way out for you? Well, if your perception is that taking out personal loans means living beyond your means and incurring additional debt, that might be true – however there may be instances in which taking one out may be the right move if you take note of all these points and understand them fully:
1. You Know Why You Need The Loan And What It’ll Be Used For.
Prior to considering applying for a personal loan, you must have an idea of why and for what purpose the money will be used. Personal loans may be an ideal solution if you’re a medical student and in need of money for tuition, books and living expenses; on the other hand, however, they might not be ideal when used to repay credit card debt or fund travel plans. If you are considering taking out a loan for business expenses, ensure you have a comprehensive business plan in place and understand your break-even point. If taking out a loan means being unable to repay it on time then consider other financing solutions like credit cards or crowdfunding as options.
2. You Have A Plan To Pay It Off And Do Not Intend To Default.
Personal loans are debt, meaning you must repay an agreed-upon sum within an agreed-upon timeframe. As long as you have an effective plan to do this, there’s no reason for alarm. However, taking out a personal loan without intending to repay it could be an expensive mistake. Though hidden fees, high interest rates, and balloon payments might make paying back your loan difficult at times, you should make it a point to do it as soon as possible. If you find that you cannot repay your loan on time, contact your lender immediately and arrange to repay it off. Otherwise, defaulting may result in legal action from lenders, including garnishing wages, placing a lien against your property, and even filing suit against you depending on your state laws. Defaulters also risk having their credit report marked negatively by non-payment.
3. You Understand All The Implications Of Taking On Debt.
As soon as you take out a loan, you are incurring debt. When taking out a personal loan, the debt you incur will show up on your credit report – though high levels of debt could have an adverse effect on your score; most lenders consider your payment history when calculating it and, provided payments are regularly made on time without defaults, this should have little effect. However, taking out multiple personal loans just to cover off existing ones with high-interest rates is likely only adding on more debt and expenses each month.
4. Personal Loans Are More Flexible Than Credit Cards Or Mortgages.
Credit cards and mortgages are two forms of traditional financing that are relatively rigid, leaving you in an awkward situation if you need to change your financing arrangement. For instance, say you are approved for a $20,000 mortgage to buy your dream home but then have an emergency medical situation arise which requires $10,000 of surgery – what then? But with personal loans you have more flexibility: taking out smaller amounts over time that can be paid back – as well as creating a clear plan to avoid taking on more debt than necessary.
5. A Loan Is Cheaper Than Paying Penalties For Late Payments.
One reason people choose to pay their bills late is the penalties involved. Credit cards, mortgages and other forms of financing often carry late payment fees; if you owe taxes late they could even put a lien against your property! Taking out personal loans gives no such worries since lenders understand emergencies happen and tend to show some flexibility with payment schedules; however if a habitual pattern of late payments arises it could damage your credit score significantly.
6. In Some Cases, A Personal Loan Can Be A Better Deal Than An Apr-only Card.
Credit cards are one of the most widely-used financing products, with most people carrying at least one. Credit cards offer convenient purchasing power while being easily paid off over time; however, APR-only cards could cost you too much interest over time. Personal loans offer more favorable alternatives; firstly you can opt for fixed interest rate personal loans (whereas APR cards always include an APR), and secondly personal loans usually require smaller down payments than required with credit cards.
There are numerous advantages to taking out a personal loan. Before considering this step, make sure that you fully comprehend why and how the funds will impact your finances – these loans provide flexible yet inexpensive ways to cover expenses or invest for the future.