Personal loans are a popular way to borrow because they’re typically easy to get and don’t require any collateral. But taking out a personal loan for something frivolous is usually a poor decision in the long run.
To help you determine whether you’re right to consider a personal loan, we’ll cover three good reasons to apply for a personal loan, and also a few bad ones.
3 times when it’s a good idea to take out a personal loan
Since personal loans usually don’t require collateral, they often charge higher interest than a secured loan. That said, it can still make sense to apply for one in these three situations.
1. You’re consolidating credit card debt
If you have a large balance on a high-interest credit card, it could take years to pay it off and cost you hundreds if not thousands of dollars in interest.
If you can manage to get approved for a personal loan with a lower interest rate, however, you could save time and money. Also, a personal loan would give you a defined repayment term, while credit card companies don’t care how long it takes you to pay off your balance as long as you’re making the minimum payment.
2. You have crippling medical debt
Roughly 3 in 10 Americans have problems with paying medical bills, according to a 2017 Kaiser Health Tracking Poll. If you’re finding it difficult to negotiate your medical bills or the repayment plan offered isn’t affordable, a personal loan can help offer some flexibility.
Personal loans offer varying repayment terms. So, while a hospital might give you two or three years to pay off a medical bill, a personal loan could extend that period for a few more years.
3. To help finance a home improvement project
Renovating your house can not only provide a better living space for you and your family, but it can also increase the value of your home. As a result, you’re effectively lowering the cost of your personal loan because it’s partially offset by the value increase.
Of course, no home improvement project recoups the full cost that you put into it. But some, like finishing a basement or minor kitchen or bathroom remodel, can give you a decent return on your investment.
When it’s not a good idea to take out a personal loan
Just because you can borrow money doesn’t mean you should. If you’re thinking about using a personal loan to fund a vacation, buy a big-screen TV or other splurges, think again. Even if you qualify for a decent interest rate on a loan, you’re still going to pay a significant amount of interest over the life of the loan.
So, if you have your eye on something big that doesn’t necessarily fit in with the other good reasons to take out a personal loan, consider saving up for the purchase instead.
How to get the right loan for your needs
If you’ve decided that getting a personal loan is the right decision for your situation, don’t go for the first offer you see. Instead, take a step back and do these three things:
1. Check your credit: Lenders typically check your credit report and score during the application process to determine whether to approve you and your interest rate. As a result, the higher your credit score, the better your chances of getting approved with a low interest rate.
2. Shop around: There are countless personal loan companies out there, each with its own set of terms and eligibility criteria. Some lenders allow you to get an estimated rate with just a soft credit check, so check out those lenders first to see what kind of offers for which you qualify.
3. Borrow responsibly: Know in advance how much money you need from your personal loan. If you borrow too much, it could be tempting to use the extra cash unwisely. And if you borrow too little, you may end up having to borrow again and adding a second inquiry to your credit report.
The bottom line
Taking out a personal loan is a long-term commitment, with some loans offering repayment terms of several years.
In the end, only you can decide what a good reason is for taking out a personal loan, but it’s critical to consider your reasons for doing so. Is it to help improve your financial situation or to buy something you don’t need?
As you honestly answer these questions with your own best interests in mind, you’ll be in a much better position to make the right decision.
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