Whether you need money to pay for an emergency, or you want to consolidate debts or are planning a wedding or you either are financing your business, a personal loan can thus offer you quick and easy access to cash. The application process is often too much straightforward, and while the lenders may ask why you want to borrow money, you’re often free to spend it however you’d like.
As with the other types of debt, personal loans are always considered as valuable financial tools. However, when they are used improperly, then they can also pose a risk to your finances. This article will tell us as to the fact that does it even make sense to take a personal loan or not.
There are Two Types of Personal Loans
A personal loan can either be unsecured or they can be secured debt.
When you take out a secured personal loan, then you are required to offer the creditor a collateral.
However unsecured personal loan don’t require any kind of collateral, although the creditor has the option to sue you and take money from your paycheck or the bank account if you aren’t making any payments.
Both the unsecured and secured personal loan are the installment loans, which means that you receive the entire amount up front and then make monthly payments. Generally, if you’re approved for the loan, then you’ll be able to choose between the different repayment periods which are available such as 24, 36, or 60 months. The interest rate may, however, range from below 5 percent to over 30 percent, and there’s often a minimum and maximum amount which you can thus borrow.
You can also choose between a fixed and a variable-rate loan. A loan with a fixed interest will, however, have the same interest rate throughout the life of the loan — which means that your monthly payment would never change. Variable-rate loans thus often start with a lower interest rate than a fixed-rate loan. However, variable interest rates can also be increased in the future, which can thus lead to higher monthly payments and also a greater cost to you over the lifetime of the loan.
If you can repay the loan quickly, then a variable rate may, however, save money, but if you want a definitive budget for the future, then a fixed-rate is the way to go.
Why do People Take Out Personal Loans?
Unlike an auto loan, a student loan, or a mortgage, personal loan always allows you to borrow money and also use it however you want. Broadly speaking, there are thus four reasons which you might want to apply for a personal loan: to consolidate the debts, to save the money, to pay for a want, or either to pay for a need.
- To Save Money By Paying Off a Higher-Interest Debt. The borrower may, however, be able to take out a personal loan and then he can use the money in order to pay off a higher-interest debt, such as a credit card debt. This could, however, save you money in the interest payments and then you’ll know as to when the debt will be paid off, which can be hard in order to predict with revolving credit accounts.
- To Consolidate Debts. A personal loan can also be used to pay off several other loans. Debts consolidating makes it easier to manage your bills leads to lower monthly payments, and it might save you money if you’re consolidating high-interest debts. A personal loan, however, isn’t the only way for the purpose of consolidating your debts, and then the borrower may want to compare this option to using a balance transfer credit card which has a 0-percent-interest offer. One option may, however, be better than the other depending on the type and the amount of debt which the borrower has, as well as the fees which he’ll pay on a loan or the card.
- To Pay for a Need. A personal loan may also be a good option if the borrower needs money for an investment or an emergency.
- To Pay for a Want.Defining the wants and needs can be difficult, but if the borrower is honest with himself, he’ll likely be able to recognize the difference. It however generally makes more financial sense in order to save up for a “want” beforehand than to borrow money and then pay off the loan with interest.
Using a loan in order to pay for the needs may be a good option and then it could be less costly than any alternative forms of payment, such as a credit card or a medical payment plan. Unless the borrower has a large emergency fund, then he may want to lean slightly towards unsecured loans rather than he putting his personal property at risk by using it as a collateral.
Where Can The Borrower Find a Personal Loan?
The borrower can get secured and also unsecured personal loans from banks, credit unions, and online lenders. The loan’s terms, credit requirements, and the amount which he can borrow however varies from one lender to the next.
Depending on the circumstances and needs, the borrower may want to look for a loan from an online lender that specializes in unsecured personal loans for the people who have poor credit. Alternatively, a local credit union also might offer the borrower the best rates on a secured personal loan, using a savings account or Certificate of Deposit (CD) as a collateral.
The borrower can often get an approximation of the interest rate and the repayment periods which each lender would offer you before agreeing to borrow the money. But first, the borrower should check to see if doing so requires a hard inquiry – which could however temporarily hurt your credit.
The borrower may, however, be able to use a personal loan to weather a financial setback, to strategically pay off a debt, or to make a large investment; however, the borrower may want to reconsider borrowing money in order to pay for a want. When the borrower does to determine that taking out a personal loan makes sense, then he must compare the differences between the secured and unsecured loans based on his needs and credit.