A 2019 survey found that most Americans could not afford to pay for a $1,000 emergency. Emergencies often cost much more than this, especially when related to car crashes or medical expenses. Because of this, even people with savings in place could see this quickly depleted. Then, there are instances when you have the savings on hand but would rather finance an upcoming purchase to spread out the cost. This is where personal loans come in.
Why Personal Loans Are a Good Choice
In the past, personal online loans developed a bad rep for extremely high interest rates. Over the years, many companies have disrupted the personal loan space with cheap loan options. The rates have become so competitive that some people prefer unsecured loans over traditional options. Here’s why.
No Judgment: Taking out a personal loan is a great way to fund previously “un-fundable” assets. For instance, banks rarely like the idea of giving you money to purchase land in the middle of nowhere, build a tiny home in the desert or buy an old rundown vehicle you want to restore. Personal loans can cover these costs and more.
No Collateral: When you finance an asset, that asset typically becomes collateral. If you default on the loan, the lender can step in and take it. This could cause you to lose your car or even your home.
Better Than Alternatives: When people need money in a pinch, they tend to swipe a credit card or go for a payday loan. These are the worst types of debts to take on. Payday loans are often unregulated and reach interest
rates of around 400%. Meanwhile, credit card interest rates average around 21.8%. If you have good to excellent credit, you can score rates much lower than these.
Great Consolidator: If you’re having a hard time keeping up with individual debt payments even though you have the money to pay, personal loans help you get organized. You could also reduce your payments if the personal loan term length is longer than what you had remaining on some of those loans.
How To Decide When To Get a Personal Loan
Whether or not taking out a personal loan is a good idea comes down to why you want to. Even though your assets don’t become collateral, your credit score takes a serious hit if you don’t repay the loan. This is why it’s important to consider your options carefully before making a decision.
It Saves You Money: The tiny home movement is picking up speed in America and many people use personal loans to fund these homes. Other people might use these loans to purchase a big solar power system. If you’re getting a loan for options like these that will save you money over the next few years, it is well worth the expense.
It Makes You Money: Some people use online loans to fund assets that generate an income afterward. An example of this is someone who uses a personal loan to finish a basement that they then rent out to long-term tenants or via Airbnb. This allows the loan to pay for itself.
You Have Savings: If you had $50,000 in the bank, used it all as a down payment on a house and then a medical emergency struck that your insurance company would not pay for, what would you do? This is why even people with savings rely on personal loans. If push comes to shove, you can always use the savings to repay the loan earlier.
You Have a High Credit Score: Lenders love to reward people with high credit scores by allowing them to take on more debt. They also give you better interest rates. You can see interest rates lower than 5% with great credit. If you have poor credit, then your interest rates could be credit-card high.
While these are the ideal reasons to get a personal loan, it doesn’t mean people who don’t fit these requirements are ineligible. It just means you end up taking on more risk. One way to reduce risk is to consider your options carefully.
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