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8 min read
Four Uses for a Personal Loan (Including a Few You Might Not Have Considered).
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If someone asked you about different types of credit and lending tools, what would you think of first? Credit cards, student loans, mortgages and auto loans would probably come to mind. But what about personal loans? Personal loans are general-purpose credit products that can be used for a multitude of purposes. Whether you’re covering an unexpected expense, big-ticket purchase or home improvement project, personal loans can provide some much-needed financing to help you achieve your goal.
Get a great rate on a personal loan!
LESSON CONTENTS
What Is a Personal Loan?
But what about personal loans? Personal loans are general-purpose credit products that can be used for a multitude of purposes. Whether you’re covering an unexpected expense, big-ticket purchase or home improvement project, personal loans can provide some much-needed financing to help you achieve your goal.
What Is a Personal Loan?
A personal loan is a type of short-term loan that does not require collateral. These types of loans are usually structured with a loan term (the number of months or years you have to repay the loan), a fixed interest rate and fixed monthly payments.
Personal loans are a good choice if you know the amount of money you’ll need. Since you know how long it will take to pay back the loan and how much you’ll be paying monthly, personal loans can be easier to plan for compared to loans with variable interest rates, monthly payments and payment schedules.
To obtain a personal loan you need to submit an application to a lender. While submitting an application may sound like a daunting task, this process is usually streamlined and can be completed online or in person. Typically, you can expect to have your application approval decision within a day of applying, making personal loans an option if you need a quicker turnaround to finance unexpected events.
While reviewing a personal loan application, lenders will use the following information to decide if the loan will be approved:
- Credit score and credit history.
- The higher your credit score, the lower your interest rate will be.
- Verification of income and work history.
- A debt-to-income ratio below 36%.
- Calculate by dividing all of your monthly debt payments by your gross monthly income.
What Can You Use a Personal Loan For?
Personal loans can be used for a wide variety of things, including:
Debt consolidation
Consolidating debt is one of the most common uses for personal loans. Debt consolidation involves combining multiple debts/lines of credit (loans and credit cards), into a single loan. For example, you could use a personal loan to pay off multiple credit cards. The advantage to consolidating multiple credit lines would be:
- Potentially lower interest rates.
- Depending on your credit score, personal loans often have lower interest rates than credit cards.
- Easier to manage.
- Tracking and managing one fixed, monthly payment may be easier than making sure you’re paying multiple bills on time (often on various days of the month).
If you plan on consolidating other high-interest debt into a lower interest personal loan, remember that the other credit lines will still be available. Avoid using the older, high-interest credit lines again before you pay off the consolidated loan, otherwise you may end up back where you started. Disconnect/delete saved credit card information from online shopping accounts or take the credit cards out of your wallet to help avoid impulse purchasing while you’re paying down your consolidated personal loan.
Check out this calculator to determine whether or not debt consolidation is a good option for you.
Life events
There are many events in life (both good and bad) that require money, in which a personal loan may help.
In a study done by The Knot, it was found that in 2019 the average wedding cost $33,900 (including the engagement ring). While most experts agree that it is better to save for the wedding and pay for it in cash, personal loans may be used as a source of financing. For example, jewelers often offer their own financing options and payment plans for engagement rings. If you plan on using a payment plan to purchase an engagement ring, see how the jeweler’s plan compares to a personal loan, looking at hidden fees, interest rates and promotional deals that may expire after a certain period of time.
On the opposite end of the spectrum, people often need help paying for funerals. According to the National Funeral Directors Association, the average funeral costs between $5,150-$7,640, for cremation and burial respectively. These costs may come up unexpectedly and catch us by surprise. If you ever find yourself dealing with the unexpected cost of a funeral, finding a loan option with a low interest rate and an easy application process may help relieve some financial stress from an already trying time.
Work-from-home office upgrades
Due to recent events, a greater portion of the work force has transitioned to working from home. While there are many benefits to working remotely, it does have its limitations. Many people have found themselves scrunched up at kitchen tables or on couches as they try to be productive while dealing with the many distractions that are found at home. A dedicated workspace not only helps maintain focus, but also makes working from home a more comfortable and enjoyable experience.
A personal loan may be used to create a customized work-from-home space that includes things like desks (sitting or standing), more computer monitors, a comfortable office chair and even better lighting for Zoom conferences and reading. Moving forward, remote work is likely to be a permanent part of the work experience, at least in some capacity. Investing in a comfortable, productive home office is sure to pay dividends in the future!
Pet expenses
“Owners will likely incur at least one $2,000 - $4,000 bill for emergency care at some point during their pet’s lifetime.”
-Dr. Louise Murray
We all love our furry (or feathered or scaly) friends. However, many underestimate the costs that can come with owning a pet. While pet insurance is becoming more common among pet owners, many are still not prepared for major veterinary bills. Dr. Louise Murray, vice president of the American Society for Prevention of Cruelty to Animals stated that “owners will likely incur at least one $2,000 - $4,000 bill for emergency care at some point during their pet’s lifetime.” This becomes an issue when coupled with the statistic that roughly 63% of Coloradans have less than $1,000 in savings. An emergency pet expense can quickly become a major financial obligation. Personal loans are not only readily available (contingent on having the loan approved), but also have lower interest rates compared to other types of consumer debt like credit cards. They can be used in a pinch to make sure your beloved pets get the care they need.
Things to look for when applying.
If you’re shopping for a personal loan, remember that not all loans are made equal. Besides looking for a personal loan that offers low interest rates and payment terms that match your needs, be on the look-out for the following:
- No application fee.
- No pre-payment penalty.
- Alerts to remind you when your loan payment is due.
The flexibility that a personal loan can provide makes it an ideal choice for a multitude of projects and needs. Like all forms of credit and debt, the pros and cons should be considered before using it to finance a project or to make a purchase.
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