Taking out a personal loan can be a positive step toward achieving your goals. It is a real commitment, with long-term financial accountability required, and patience is a must. Successfully paying off a personal loan is character-building and also provides valuable advantage for further loan approvals at a later date. In fact, there are several scenarios where taking out a personal loan is a good idea.
Unlike mortgage and car loans, a personal loan can be used for almost anything. As long as your purpose is legal and responsible, and you fulfil the loan requirements, the money is yours to use. The easy money comes at a cost though – higher interest rates. A personal loan is often ‘unsecured’ due to there being no collateral to cover the lender in case of a loan default. Therefore it’s in the lenders best interest to keep the rate high enough to cover costs yet still remain competitive.
Personal loans are best avoided by people who don’t manage finances well. Although the fast money will initially seem like a dream come true, the burden of responsibility will soon take the sheen off, and a casual or lax approach to repayments could creep in. Penalties for late payments are a wake-up call for the borrower and a boon for the banks. Lenders exact huge sums of money via late payment fees attached to a range of products, enabling them to write-off loan defaults and still keep interest rates down.
When a personal loan is a good idea
There are times when a personal loan is the best approach to overcome a financial hurdle. Turning plans into reality fast with a personal loan is painless, enabling you to get on with the next phase of your financial and personal growth. Here are a few examples of personal loans used effectively.
Consolidating credit cards
Although not the most fun purpose for a personal loan application, the decision to consolidate credit card debt with a personal loan will lead to earlier financial freedom. This option is attractive because credit card interest rates are comparably much higher than rates for personal loans. The credit card debt spiral remains a financial trap for many people, and rolling all this debt into one personal loan with lower and regular repayments seems like a good idea.
Increasing the value of your home
Under expert guidance, a home renovation can add tremendous value to a dwelling. On the other hand, throwing good money after bad in order to patch up an already botched home reno is sheer foolishness. There are numerous good reasons for upgrading a home and expanding its potential, and people in a sound financial position can expedite their home improvement plans with a personal loan.
Making a major purchase
Personal loans can cover most of the major purchases made during the course of life. This is very convenient, but it doesn’t pay to take your eye off the ball in getting the best deal. Interest rates are always changing and vary according to lender. Special competitive rates are continually enticing new customers, while faithful customers can expect rewards and discounts.
If purchasing a car, take the time to see what rate a lender will offer. It will be tempting to finance with the dealer or seller on the spot, but you could be getting tricked into a much higher interest repayment rate. Personal loans for cars are appealing for one major reason. The car can act as ‘security‘ on the loan, meaning your lender has financial protection and interest repayment rates will be much lower.
Weddings, parties, anything
Most major events can be financially covered by planning well ahead. However, there are times when a festival or wedding plan can sap additional finances also. The tendency might be to sort through credit cards for available funds, but a personal loan could be the cheaper option. Most personal loans charge considerably less interest than credit card rates, and the tendency to overspend and get into further debt is curtailed by the one-off nature of the personal loan.
An additional bonus of taking out a personal loan is the positive reflection on your credit score. Having a mix of well managed loans and accounts is looked upon favourably. A personal loan shouldn’t be taken out on impulse or simply to impress others. Impatience should also be avoided. Sometimes it’s better to stay patient, save up, and pay cash when savings have accumulated. Overall cost is far less when interest is negated altogether.