When Are Personal Loans a Good Idea?
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Personal loans can be the right choice in many situations. First, let's define a personal loan. Some loans are for certain purchases. You buy a house with a mortgage loan, you buy a car with a car loan and you pay college with student loans.
But personal loans can be used for anything. Some lenders want to know what you will do with the money they give you, but as long as you borrow it for responsible and legitimate reasons, you can do what you want from it.
But what does that mean for you? With a mortgage, your home is a mortgage. Likewise, with an auto loan, the car you buy is a mortgage. Since personal loans often have no collateral - these are "unsafe" - the interest rate may be higher. There are also personal loans that are safe if you want to lower your costs.
Here are five circumstances in which personal loans can be a great idea.
1. Consolidating Credit Cards
If you have one or more credit cards that cost the most, you can get a personal loan to consolidate all bills into one monthly payment. What makes this scenario more interesting: The loan interest rate can be much lower than the annual percentage rate (APRs) on your credit card.
2. Refinance Student Loans
Refinancing student loans may provide some financial assistance. Your student loan interest rate may be 6.8% or higher, depending on the type of loan you have. But you may be able to get a personal loan with a lower interest rate that lets you pay off your loan faster.
Here's the problem: Student loans come with tax advantages. Also, if lawmakers offer a loan forgiveness program in the future, and also where it is now, student loans that have been refinanced will not qualify.
If you use a personal loan to pay off all or part of a student loan, you will lose the ability to reduce your interest payments (when you are filing your income tax) along with the benefits provided with some loans, such as patience and delay. And if your balance is large enough, a personal loan may not cover it.
3. Purchase Finance
Funding a purchase depends on whether it is a desire or a necessity. If you are going to take out a loan as well, getting a personal loan and paying the seller in cash may be better than financing through the seller. Never make decisions about on-site financing, though. Ask the seller to offer and compare with what you can get through a personal loan. Then you can decide which option is right.
4. Pay for Marriage
Every major event - such as a wedding - qualifies, if you will eventually give all the bills related to your credit card without being able to pay for it within a month. Personal loans for such large expenses may save you the amount of interest because the amount is lower than your credit card.
5. Fix Your Credit
Personal loans can help your credit score in two ways. First, if your credit report shows most credit card debt, personal loans can help "mix your accounts". Having different types of loans often benefits your value.
Second, it can lower your credit usage ratio - the total amount of credit you use compared to your credit line. The lower the total amount of credit you use, the better your value. Having a personal loan will increase the total amount you have to use.
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