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Good And Bad Ways To Use A Personal Loan

If you need money quickly, one of your best options is to apply for a personal loan. Banks and certain financial institutions can advance funds to a borrower in a matter of days. You don’t need to go through a complicated application procedure. Neither do you need to provide any collateral.

All that you have to do is furnish your Social Security number and some other basic information. Based on your requirement and the lender’s credit appraisal process, you could borrow between a few thousand dollars and $100,000.

But you need to be careful before taking a personal loan. Don’t borrow just because these loans are easily available. You will be liable to make monthly payments for a period that may stretch up to five years. Additionally, as these loans are unsecured, interest costs can be high.

When is a personal loan justified?

When you use a credit card to make a purchase, you can either pay the entire amount at the end of the month or “roll over” part of the debt. If you opt to make only a partial payment, you would be liable to pay interest on the remaining amount.

Credit card debt can be expensive. The average annual percentage rate (APR) that a cardholder pays is 16% per year. Individuals with low credit scores can pay 24% or more. Taking a personal loan to pay off your credit card debt makes sense if you can borrow at a lower rate.

How much does a personal loan cost? If you have an excellent credit score, it is quite possible to borrow at an APR of 9% to 11%. But if your score is lower, expect to pay a far greater rate of interest. However, as a general rule, personal loans cost less than credit card debt.

It is also perfectly reasonable to use a personal loan for paying your educational expenses. A college degree or a shorter duration course will help you to get a job that pays more. This extra income can be used to pay off the loan.

If you need to repair your home and don’t have the money to do so, a personal loan can be of great help. By spending a few thousand dollars in repair costs, you will be able to pay for the upkeep of an asset that costs hundreds of thousands of dollars.

Should you use a credit card instead?

While a personal loan can be of great help in certain situations, there are times when it is preferable to use a credit card for making payments. Consider a situation where you have to make an unplanned expense of about $1,000 or a little more. You may need this sum for car repairs or to pay for medical costs.

Should you apply for a personal loan or simply use your credit card? Remember that you get up to 30 days or more of free credit when you spend on your card. Your interest expense is zero for this period. If you can pay off your card dues at the end of the month, it is better to charge the expense. Taking a personal loan is not advisable in this situation because you would be required to pay interest from day one.

At times, the financial institution providing the personal loan stipulates a minimum sum that may be borrowed. If the lender requires you to apply for, say, $3,000, and you need only $1,000, you may be tempted to take a larger loan than you need. This would result in paying interest needlessly and you should be careful that you don’t fall into this trap.

Don’t use a personal loan for these expenses

The easy availability of these loans can induce you to borrow when you don’t really require the money. If you plan to go on a holiday, it is better to use your savings. Similarly, utilizing borrowed funds for day-to-day expenses is unwise.

If you follow this practice, you will have to use part of your future earnings for loan repayments. Consequently, your investments and retirement savings could take a hit.

Which are the expenses that you should avoid paying for with a personal loan? The answer to this question would be different for each individual. But there is one generalization that can be made. Don’t take a personal loan for non-essential expenditure. Instead, it is better to save and use the funds that you have accumulated.

Shop around before you finalize your loan

If you have decided to take a personal loan, you should not finalize the transaction without obtaining details about the terms and conditions from at least three or four lenders. Interest rates and charges can vary and it is always useful to carry out a comparison between different lenders. If you do this, it is quite possible that you will save several hundred dollars or more over the term of the loan.

References

https://www.investopedia.com/articles/personal-finance/111715/when-are-personal-loans-good-idea.asp https://www.nerdwallet.com/blog/loans/credit-card-personal-loan/ https://www.forbes.com/sites/andrewjosuweit/2017/08/12/5-money-problems-you-should-never-solve-with-a-personal-loan/#5ab5a0b36c4b https://www.credit.com/loans/loan-articles/how-to-shop-for-the-best-personal-loan/