Personal loans can be a viable option in a variety of circumstances. First, let’s define a personal loan. A personal loan is a type of unsecured loan and helps to meet your current financial needs. You don’t need any security/collateral while availing it. Personal loan gives you the flexibility to use the funds as per your convenience and need.
Some loans are earmarked for a specific purchase. With a home loan you can buy a home, With an auto loan you can purchase a car and you pay for college with a student loan.
But a personal loan can be used for just about anything. There could be some lenders want to know what you will do with the money they lend you, but as long as you’ve borrowed it for a responsible and legal reason, you can do what you want with it.
But what does that mean for you? With a mortgage, your home is the collateral. Similarly, the car you buy is the collateral if you opt an auto loan. A personal loan often has no collateral – it is “unsecured” – the interest rate will probably be higher. There are also secured personal loans if you want to lower your costs.
It doesn’t help that it is hard to decide which reasons are valid for getting a loan in the first place. To help you out, here are 3 good reasons to get a personal loan:
- Paying off Debt
A sensible and wise use of a personal loan is paying off other loans that are becoming hard to manage. If you have a large outstanding amount from another loan, or a credit card then you can use a personal loan for clearing the debt.
- Finance a Purchase
Financing a purchase depends on if it is a want or a need. If you’re going to take out a loan anyway, getting a personal loan and paying the seller in cash might be a better deal than financing through the seller. One should not make any kind of decision on the spot about financing. Ask the seller for an offer and compare it to what you could get through a personal loan. Then you can decide which the right choice is.
- Improve Your Credit
A personal loan might help your credit score in two ways. First, if your credit report shows mostly credit card debt, a personal loan might help your “account mix.” Having different types of loans is often favorable to your score.
Just like there are many good reasons for getting a personal loan, there is a fair share of bad ones too. Here are the top 3 of them:
- Investing in Stock Market
Investing in stock market is always risky, but still, there are people who remain undeterred and make a fortune from their investments. If you are feeling lucky then there is no harm in giving it a shot. However, if you have to take a personal loan for that then it can easily end badly. Companies go bankrupt all the time, and if your money is on one then you could end up paying EMIs for a loan that dissolved completely.
Gambling lies in a somewhat grey area when it comes to ethics. If it is legal in your area, then engaging in it is perhaps not wrong. However, if your compulsions are so strong that you have to take personal loans just to partake in gambling, then it can never be a good idea.
- Investing in a New Business
Starting your own business can often be a life-changing experience. However, you should avoid taking a personal loan for the investment. This is because there are plenty of better options such as roping in co-investors or angel investors, or choosing asset-based loans, small business loans, etc.
Whenever you have to decide if you should get a loan or not always ask yourself two things- 1) Is the loan absolutely necessary? 2) Is the loan for an appreciating asset (house, for instance). If the answer to any of these two questions is yes then the loan can be a good idea.