Responsible Borrowing: 5 Good Reasons for Taking Out a Personal Loan

Responsible Borrowing: 5 Good Reasons for Taking Out a Personal Loan

When life’s special moments happen, you want to be financially prepared for them. Personal loans can be a viable banking solution for the cash-strapped to enjoy once-in-a-lifetime occasions.

From building your business to remodeling your home, personal loans can give you the opportunity to finance just about any financial goal or dream.

Personal loans defined

Before getting into the many reasons why you should consider applying for a personal loan, it’s important to define what a personal loan is.

By definition, a personal loan is one granted for the use of just about any purchase. Most personal loans are considered “unsecured,” meaning borrowers are not required to put up any collateral to guarantee repayment. When compared to business or commercial loans, personal loans are relatively small amounts, with the typical personal loan amounting to $50,000.

Personal loans are often used by borrowers to fund various purchases such as travel costs, wedding expenses, or home renovation projects. The amount of personal loan provided is determined by the borrower’s credit score and the purpose of the loan.

If you’ve considered applying for a personal loan, here are five good reasons why personal loans are a smart financial option.

1. It comes with better rates than a credit card

Most people often default to credit cards to fund purchases. Turning to credit cards when you need to borrow some money can be a costly, financial mistake. With average credit card interest rates hovering at around 15 to 20 percent, financing purchases on credit cards can be detrimental to your credit score.

Personal loans, on the other hand, are a more affordable way to finance purchases. Terms on personal loans are much more manageable. There’s a fixed credit term and a fixed interest rate which is often a lower rate, allowing you to reduce monthly interest costs.

And unlike a credit card, you can’t borrow more money until a new application is completed, limiting risk of increased debt.

2. You can pay for large expenses

Events like weddings are a once-in-a-lifetime moment. Personal loans are a great option to finance such expenditures. Other personal projects that a personal loan can help finance include home renovations, moving expenses, travel costs, medical bills, and funeral expenses.

Using a personal loan to finance big-ticket items gives you flexible payment options that won’t keep you stuck in debt.

3. You could start a business on the side

With the current economic landscape, more people are turning to “side hustles” to maximize their cash flow and secure a more financial future. But becoming an entrepreneur, even part-time, can be an expensive endeavor.

A personal loan is a viable financial option to successfully starting a side business.

Whether it’s a weekly podcast or a small Etsy store, a personal loan can provide you with the necessary capital to start your side business. And with most personal loans being unsecured, there’s no pre-requisite of collateral to get loan approval.

4. You can create an emergency fund

When unexpected bumps happen in life, you’ll want a financial buffer to protect you against uncertainty. Having a proper emergency fund is necessary in the event of personal financial dilemmas such as unexpected medical emergencies or the loss of a job.

Taking out a personal loan during such dark days can create a safety net of funds that enables you to weather those rainy days. With its fixed credit term and interest rates, a personal loan can give you enough time to re-establish your savings without further sinking you into debt.

5. It can help improve your credit score

Credit scores are calculated through various factors, namely: amounts owed, credit history, payment history, and types of credit used.

Personal loans can be used to consolidate credit card debt to improve your credit rating. As it’s an installment loan rather than a revolving loan like a credit card, the debt on a personal loan won’t negatively impact your credit score.

Having a personal loan also creates different types of credit used, an important determining factor on your credit score.

Be careful when using a personal loan

Like any other type of loan, financing purchases through a personal loan isn’t always a wise move for every instance. While it can be a helpful solution for certain financial situations, there can be certain disadvantages with signing a loan agreement

Engage a trusted establishment in a thorough consultation so you can be sure to have all the facts. Be smart about your loaning requirements, and if you have a real need to borrow, find the financial product that makes the best sense for your situation. If there are alternative banking solutions that can be explored, make sure to do thorough research.

 

Categories: Finance

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