Which Best Describes A Way People Can Use Personal Loans?

Personal Loans

A personal loan is a very common type of loan and people use a personal loan to improve their financial condition. Basically, personal loans are borrowed money that people use for large purchases, pay-off high-interest debt, purchasing a house, etc. So, what are the best ways people can use their personal loans?

A personal loan is an excellent financial instrument that people can use for various emergencies. The lack of collateral also makes the personal loan an ideal funding option when you need emergency money. The best way people can use the personal loan is using it in medical emergencies, for debt consolidation, home improvement, wedding, unplanned vacation, education, etc.

What Is Personal Loan?

What Is Personal Loan

A personal loan is a type of loan where people borrow money from a bank, credit union, or online lender and use the money for a variety of reasons. Usually, personal loans have fixed monthly payments and have a loan term of one to seven years. When you take a personal loan, you have to pay the loan amount with interest. Moreover, some banks and lenders also charge fees for personal loans. Repaying a personal loan is different from repaying a credit card debt. For a personal loan, you have to pay fixed-amount installments over a set period of time until the debt amount is completely repaid.

Types Of Personal Loan

There are two types of personal loans available. They are – 

1. Secured personal loans

2. Unsecured personal loans

Secured Personal Loans: This type of personal loan is backed up by collateral, like a savings account, or CD. If you can’t make the payments then your lender has the right to claim your asset as payment for the loan.

Unsecured Personal Loans: This type of personal loan isn’t backed by collateral. Here, the lender has to decide whether you would be able to pay the debt amount in time. The lender approves the loan application based on your financial history and credit score. If you don’t qualify for an unsecured loan then the lender might offer you a secured personal loan.

How Personal Loan Works

How Personal Loan Works

Personal loans are a type of installment loan. It means, when you apply for a personal loan, the lender gives you money that you have to pay back with interest in monthly payments over the loan term. Usually, the loan term of personal loans ranges from 12 to 84 months or more depending on the loan amount. When you pay the full loan amount your account will be closed. The loan amount for a personal loan varies depending on the lender but typically ranges from $1,500 to as much as $100,000. What personal loan amount you will qualify for depends on your credit history. If you have a healthy credit score then you will easily qualify for a large personal loan. Below is a detailed step-by-step instruction on how personal loan works – 

1. First, decide the amount of personal loan that you want

2. Next, compile all the required documents

3. Choose a bank or credit union where you want to apply for the loan

4. Now, apply for the loan amount

5. Submit all the required documents

6. Next, the lender will check all the documents to find out your credit-worthiness

7. If you clear all the requirements then the lender will make an offer

8. Make sure you check all the loan terms like interest rate, loan term, etc. 

9. Once you accept the offer from the lender, the lender will transfer the money to your bank account

When To Consider A Personal Loan

Before applying for a personal loan, you should consider whether there may be less expensive ways you could borrow money. Some of the key reasons you should apply for a personal loan are – 

1. You don’t qualify for a low-interest credit card

2. The credit limits on your credit cards don’t meet your current requirement

3. The personal loan is your least expensive option for borrowing emergency funds

4. You don’t have any collateral to offer and apply for other types of loans

5. You need to borrow money for a fairly short and well-defined period

What To Consider Before Taking Out A Personal Loan

Before taking a personal loan, you should consider quite a few things. Keep these things in mind when you prepare to apply for a personal loan – 

1. Interest Rates: Usually, personal loans are available at fixed-rate APRs, therefore your monthly loan payment remains the same for the loan’s lifetime. Some lenders offer personal loans with a variable rate. If you prefer personal loans with a variable rate then you should make sure that you’re comfortable with your monthly payments changing if rates go up or down.

2. Size Of The Loan: Personal loans are available in a wide range of loan sizes and they range from $500 to $100,000. Therefore, before applying for a loan you should consider how much you can afford to pay each month.

3. Loan Term: The loan term means the length of time you have to pay off the loan. For a personal loan, the loan term is usually between one and seven years. The longer the loan term the smaller your monthly payments will be but you have to pay a higher interest rate.

4. Fees: Many lenders charge origination, or sign-up, fees, while others don’t. Therefore, check the lender whether they charge fees or not before applying for a personal loan.

Best Ways People Can Use Personal Loan

On many occasions, a personal loan is the best way to finance a large purchase or tackle emergencies that you can’t afford upfront. Below are some common reasons people take a personal loan – 

1. Debt Consolidation

2. Alternative to Payday Loan

3. Home Remodeling

4. Moving Costs

5. Emergency Expenses

6. Appliance Purchases

7. Vehicle Financing

8. Wedding Expenses

1. Debt Consolidation

Debt consolidation is one of the most common reasons why people take a personal loan. For example, you can apply for a loan and use it to pay off multiple other loans or credit cards. It means you are combining all your outstanding balances into one monthly payment. Combining all the debt makes it easier for you to work out a time frame to pay off all your outstanding balance. Another advantage of using a personal loan to pay off your credit cards is, you will get a lower interest rate so that you will be able to reduce the amount of interest you pay and the amount of time it takes to pay off the debt.

2. Alternative To Payday Loan

If you need an emergency fund then you can take a personal loan instead of a payday loan and by doing so you can save hundreds of dollars in interest charges. According to the Federal Reserve Bank of St. Louis, the average APR for a payday loan is 391% while the maximum interest rate on a personal loan is only 36%. Moreover, payday loans have short repayment terms but personal loans have longer-term lengths which is more convenient.      

3. Home Remodeling

Many homeowners use personal loans to upgrade their home, do remodeling, or do repairing like fixing the plumbing, redoing the electrical wiring, etc. A personal loan is a good fit for homeowners who don’t have equity in their home or don’t want to take a home equity loan. Moreover, for a personal loan, you don’t have to use your home as collateral since a personal loan is unsecured.   

4. Moving Costs

Moving from one place to another can cost you lots of money. For example, the average cost of a local move is $1,250 and the average cost of a long-distance move is $4,890. So, if you don’t have that kind of cash then taking a home loan is the best way to collect the required funds. You can also use the personal loan to move your household belongings from one place to another, purchase new furniture, transport your vehicle across the country, etc. 

5. Emergency Expenses

If you have any emergency and need a large amount of money then you can use the personal loan to control the situation. For example, you can use the personal loan for a loved one’s funeral. Usually, the median cost of a funeral is $7,640 which can be very difficult for many people to afford. Surprise medical bill is another common reason people take a personal loan.  

6. Appliance Purchases

Many people use their personal loans to buy home appliances. If you need to buy a new washer and dryer but if you don’t have sufficient balance then a personal loan can relieve your tension. You can use the personal loan to purchase major household appliances and electronics. You might have to pay interest and potentially upfront fees for a personal loan but in the long run, it will save you time and money.   

7. Vehicle Financing

If you can’t afford a secured vehicle loan then you can use the personal loan to finance a vehicle. You can use the personal loan to cover the cost of a car, boat, RV, or even a private jet. Moreover, if you are buying a used car from another consumer then a personal loan will help you buy the car without breaking your savings account.  

8. Wedding Expenses

This is another common reason; people take a personal loan. Wedding is very expensive and the average cost of a wedding in the USA is around $32,000. For many couples, it is very difficult to manage that amount of money. In this type of situation, they can take a personal loan to cover the wedding expenses.   

Final Thoughts

Finally, at the end of the day, you can use the personal loan for almost anything you want. Therefore, this loan is called “personal.” So, there is no doubt that a personal loan is an excellent option if you need extra cash for a specific purpose. But you should keep in mind that no matter the circumstance you have to pay the full loan amount!

Last Updated on November 14, 2021 by Musa D

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