Personal loans are fast becoming an essential financing product for individuals to meet expenses that cannot be covered by credit cards, overdrafts, and savings. A personal loan is a loan provided by a financial institution or lender at a fixed interest rate for a fixed tenure. Personal Loans help you to get funds for any one time expense like marriage, education, home renovation etc. You can also use it to pay off another personal loan, or even to invest in your business. Well, if you think taking up personal loans means living beyond your means and incurring more debt as a result, you’re right on target. However, there are situations when taking up a personal loan can be the best option available – IF you have read these points and understood them well:
1. You know why you need the loan and what it’ll be used for.
Before you even think about applying for a personal loan, you should have a clear understanding of why you need one and what it will be used for. For example, if you’re a medical student and you need money to cover the cost of your tuition, books, and living expenses, a personal loan is a great option. On the other hand, if you need the money to pay off credit card debt or to fund a vacation, a personal loan is probably not the best choice. If you’re taking out a loan for expenses related to your business, make sure you have a concrete business plan in place and you understand your break-even point. If taking out a loan means that you won’t be able to repay it, then you should probably look at other financing options, such as credit cards or crowdfunding.
2. You have a plan to pay it off and do not intend to default.
A personal loan is a form of debt, which means that you’re required to repay a fixed amount in a fixed amount of time. If you have a plan to repay the loan on time, then there’s no reason to be worried. However, if you have no intention of paying off the loan, then taking out a personal loan is a big mistake. Although hidden fees, high interest rates, and balloon payments can make it difficult to repay your loan on time, you should make it a point to repay it anyway. And if you cannot repay your loan on time, you should contact your lender and make arrangements to pay it off. If you default on your loan, the lender has the right to take legal action against you. Lenders can take action against you by garnishing your wages, putting a lien on your property, or even suing you. Depending on the laws in your state, lenders can also put a black mark on your credit report as a result of non-payment.
3. You understand all the implications of taking on debt.
When you take out a loan, you’re essentially taking on debt. When you take out a personal loan, the amount of debt you incur will be reflected in your credit report. While high levels of debt can have a negative impact on your credit score, there’s no reason to worry. In fact, most lenders will take your payment history into account when calculating your credit score. If you’re regularly making payments on time, you should have nothing to worry about. However, if you’re taking out a personal loan to pay off another personal loan and/or making only the minimum payment each month, you’re likely to be taking on more debt and incurring more expenses as a result of high interest rates.
4. Personal loans are more flexible than credit cards or mortgages.
Credit cards and mortgages are two traditional forms of financing that are relatively rigid. As a result, you may find yourself in a sticky situation if you need to make a change to your financing arrangement. For example, let’s say you’re approved for a $20,000 mortgage to buy a home and you receive the full amount upfront. But then, your spouse suddenly has a medical emergency and requires $10,000 in surgery. What do you do? But with a personal loan, you can take out a smaller amount that you can pay back over time. And if you have a clear plan in place, you can make sure that you don’t take on more debt than necessary.
5. A loan is cheaper than paying penalties for late payments.
One of the major reasons why people choose to pay their bills late is because of the penalties involved. Credit cards, mortgages, and other types of financing usually come with a late payment fee. If you’re late paying your taxes, the government can put a lien on your property. However, if you’re taking out a personal loan, you have no reason to worry about being late on your payments. Lenders know that emergencies happen and are more likely to show some leniency. That being said, if you’re regularly making late payments, it could negatively impact your credit score.
6. In some cases, a personal loan can be a better deal than an APR-only card.
Credit cards are widely used as financing products and most people have at least one credit card in their wallet. Credit cards can be a great way to make purchases and pay off the balance over time. However, if you’re using an APR-only credit card, you may be paying more interest than necessary. That being said, personal loans can be a better deal than credit cards for two reasons. First, you can choose to get a personal loan with a fixed interest rate. Credit cards, on the other hand, always come with an APR. And second, personal loans usually allow you to make a smaller down payment than what you would need to make with a credit card.
There are plenty of reasons why you should consider taking out a personal loan. You should understand why you need the money, how you’re going to pay it back, and how it will affect your financial situation. Personal loans are flexible and inexpensive ways to cover expenses and make investments in your future.