8 Reasons You Might Need a Personal Loan
Personal loans can be a logical solution when you have a large expense or you’re looking to consolidate other debt. This type of loan is unsecured, which means you don’t have to worry about putting up any collateral. A personal loan also offers a fixed rate with a fixed repayment schedule. That means there’s no guessing as to what your monthly payment requirement will be or how long it will take to pay the loan back.
Here are a few times it may make sense to shop for a personal loan.
8 reasons you might need a personal loan
Trouble paying bills
Unplanned circumstances may arise that make it difficult to keep on top of household bills. For example, an extremely cold winter may result in heating bills that are much higher than what you budgeted for, your homeowner’s insurance rates may experience an increase and your landlord may raise your rent. Start by contacting the companies directly and being frank about your situation. In some cases, they may be able to put you on a lower payment plan or work with you in other ways. If ultimately, you’re still left with bills you can’t afford, a short-term personal loan may be a good solution.
Whether your car needs a new engine or transmission, or you get into an accident that requires repairing a fender, a personal loan can help. CarMD’s 2017 Vehicle Health Index report revealed that U.S. car repair costs rose 2.7 percent the previous year. The average check engine light repair alone ran $397.87. There are also vehicle repairs that render a car inoperable until the issue is remedied, such as replacing a starter, and this is a problem if you don’t have any money set aside for the repairs.
A personal loan may give you the upfront money you need for a medical procedure, as well as keep unpaid medical bills from going into collections. Even if you have insurance through work or the marketplace, you’ll still have to meet the policy’s deductibles and make the required copays. Just one emergency case of appendicitis or pneumonia has the potential to cause a financial strain on a family, especially if the insurance policy comes with a high deductible. You may also be faced with unplanned dental procedures, like root canals and extractions, and these aren’t typically covered by insurance unless you have a separate dental plan.
For consumers who have high-interest credit cards or other loans, you may be able to take out a personal loan for debt consolidation. This means you’ll apply for a personal loan and use it to pay off your existing debts. Then, you’ll be left with one new loan at one monthly payment and interest rate. You may be able to save a lot of money on interest charges this way, especially if you can get a personal loan with a lower rate than your other debts. Another benefit is that it can be easier to manage one debt with one monthly payment versus several debts with varying due dates and minimum payment requirements.
A personal loan can help give you the money you need to invest in projects that could improve your home. Another common way to fund a home improvement project is a home equity loan. However, while a home equity loan would also provide the necessary funds to make repairs to your home, it requires collateral — your home itself. That means if you default on the loan payments, your home can be foreclosed on. A personal loan, on the other hand, is unsecured and requires no collateral. If you were to default, the lender would have to take you to court to recoup their losses. The amount you can borrow for home improvements using a personal loan varies by lender, as do the interest rates, so make sure you take the time to compare offers from multiple lenders.
If your company or small business needs to expand their inventory, office space or equipment, you may want to take out a personal loan. You’ll certainly want to weigh the pros with the cons here, however. In some case, it makes more sense to go for a traditional business loan, especially if you need a larger amount than a personal loan might provide or if you can secure better terms with a business loan. “The best use for a personal loan is if you’re using the loan to build your overall wealth,” said Bill Nelson, a financial planner and founder of Pacesetter Planning in Philadelphia. “By borrowing to start a business, you’ll be able to grow the business faster than you would otherwise. The upside of the business growth can justify the cost associated with taking out a personal loan.”
Pets are important members of the family that are also susceptible to serious illnesses or injuries. A few of the more common pet emergencies include difficulty breathing due to an allergic reaction or heart failure, seizures and accidental ingestion of toxic chemicals. Many veterinarians require a portion of the treatment expense be paid upfront. If you don’t have the cash on hand, a personal loan can be a lifesaver. Pet care credit cards are available and may offer low intro APRs for a short term, however, these cards often carry deferred interest clauses. That means if the full balance isn’t paid by the time the intro period ends, interest is charged all the way back to the original purchase date. With a personal loan, you know exactly how much interest you’re paying, and you won’t encounter any surprises down the road.
Most college and university financial aid refunds aren’t issued until several weeks to a month after the school semester begins. If you’re counting on that money for books and supplies, you’ll have a problem. Check your school’s policy and if it follows the above schedule, you may consider taking out a personal loan to cover the expense for now. A personal loan will give you the funds you need to purchase books, scientific calculators and any other classroom supplies you may need to be successful at the start of the semester, not weeks after it has already begun. Once your student loan refund comes in, you can use that money to pay back the loan.
How to use a personal loan wisely
When debt is used wisely, it can get you out of a sticky situation. Following the 28/36 rule is helpful in determining whether a personal loan will help or harm your budget. This rule advocates that one should aim for spending 28 percent or less of their pre-tax household income on home debt and no more than 36 percent of this income on total debt, which includes any personal loans.
What you borrow the money for matters. Assets that appreciate in value over time, add value or set you up for a bigger return are ideal. For example, a personal loan to help with college expenses may be considered reasonable because a college degree may lead to the ability to obtain a higher paying job later. A loan for home improvements may increase the value of your home, allowing you to make a profit later.
Another important best practice when applying for a personal loan is to have a repayment plan in place. Are you getting a tax refund in the next three months that will cover the loan? Have you been given a promotion at work that will allow you to make the extra loan payments? Will you get a temporary second job to pay off the loan? If you don’t have a repayment plan and you miss your monthly payments, your credit will begin to suffer. The lender may even opt to send your account to collections. The delinquency will show up in your credit reports.
Where to find the best personal loans
Once you determine that a personal loan is best for your needs and circumstances, you’ll want to compare loans to get the best deal. Sites like LendingTree help make that process a breeze. You can fill out a short online form and potentially see offers from as many as five lenders, making it easy to compare and be sure you’re getting the best rate.
When examining the loans in a particular category, make sure to look for the lowest APR, the most favorable terms and the least amount of fees, such as origination fees and prepayment penalties. The Truth in Lending Act requires each lender to reveal these details so that you know exactly what to expect when you sign on the dotted line.
Before making a final decision, contact your local bank to see what they have to offer. Sometimes banks have special rates for their current customers. Compare those results with the information you received from LendingTree and begin filling out the application with the lender who has the best deal.
When you need cash fast, a personal loan may be a good option. Most lenders have online applications that speed up the process. Some banks will even approve and deposit the funds from the personal loan into your account within 24 hours, although that varies by lender. Of course, it’s always important to take the time to do your homework and make sure you can meet the financial obligations associated with the loan so that the personal loan is used correctly as a tool to help you with your current financial situation.