5 Common Uses for Personal Loans

5 Common Uses for Personal Loans

Personal loans are a form of unsecured loans that are taken up either from banks or other non-banking institutions by individuals to meet their personal needs. These loans are not secured against any asset so the borrower does not put up collateral. Personal loans are provided on the basis of key criteria such as the borrower’s level of income, credit history, and repayment capacity. Individuals can get personal loans from online lenders and traditional banks.

Individuals can borrow a specific amount of money and repay within a specified duration ranging from a couple of months to several years. The repayment amounts are regular and even installments because the interest rate is usually fixed; for this reason, personal loans are also called installment loans. A personal loan can range anywhere from several hundred to more than ten thousand dollars. The borrower receives the funds as a lump sum.

Benefits of Personal Loans:

Personal loans are the most flexible. This is because they’re extended to borrowers based on their creditworthiness and not based upon securing collateral. Also, personal loans can be used for anything and the borrower does not have to specify to the lender what they intend to do with the funds.

Other advantages of personal loans are:

1. Building your credit portfolio

Personal loans help you to build your credit portfolio within a short time. They are also a great way to increase your credit limit.

2. Fast Processing

Personal loans do not require one to fill in elaborate paperwork. The loan request is processed within a period of 1­2 days.

3. Flexibility

The loans are really flexible. The borrower is under no obligation whatsoever to use the loan in a specific manner. Basically, you can use the loan as you please; which makes it a preferred choice for different situations.

Factors to Consider before Taking out a Personal Loan

If not properly managed, personal loans can land you in serious debt and associated trouble. Below is a compilation of the things that should be put into consideration before applying for personal loans:

1. Total Cost of the Loan

The arising cost from a loan is not just the interest. There are other costs including penalties, payment charges, and processing fees. These must all be taken into consideration.

2. Interest Rates

Personal loan interests are relatively high; some are as high as 25%. Before you request for a loan, you need to ask if they offer a reducing balance interest rate. The nature of the rate of interest can greatly affect the monthly repayment amount. The two options are:

• Fixed Interest Rate. With this, you pay a fixed amount of interest for the entire repayment period.
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• Reducing Balance Interest Rate. With this, the interest is calculated based on your principal amount as you continue to make payments. As the principal amount goes down, so does the monthly repayment amount.

3. The EMI

Calculate the EMI to determine if it’s a reasonable amount that you can handle with your current income level. This will go a long way in avoiding any penalties or accruing debts.

4. The Repayment Period

Generally, the repayment period is determined based on the amount of the loan and one’s ability to repay the loan.

Personal loan tenures do not last more than 60 months. Shorter tenures mean that one would end up paying less total interest but an increased EMI. Longer tenures mean that the EMI is lower but you end up paying higher interests.

5. Active Loans

It would not be wise to apply for a personal loan if you already have multiple outstanding loans because you will end up increasing your financial burden.

Uses for a Personal Loan

Due to their flexibility, personal loans can be used in several different ways. Most people usually have valid reasons for taking out personal loans. A personal loan can make a huge financial impact on your life depending on whether you put it in good or bad use. Some of the common uses for personal loans are:

1. Emergencies

Personal loans can be a lifeline and when you’re faced with financial emergencies. Emergencies are inevitable and they happen all the time. When you have encountered a job loss and need a large amount, for example, personal loans can help you fill the gap.

Another instance that would count as an emergency situation is when you lose a family member and require money for the funeral costs. Personal loans have proven to be a great tool for those looking for a way to make paying for urgent expenses more manageable.

2. Debt Consolidation

Consolidating multiple types of debt is one of the most common uses of personal loans. It works by bundling your current debts into one package. Getting a personal loan can help your financial situation by paying off your other debts. You should check first to see if it has a lower interest rate than your original debts. Refinancing will save you thousands of dollars in interest payments and reduce your monthly repayment amounts.

3. Starting a Business

Many entrepreneurs take out personal loans to help them fund their start­up businesses. If you’re on a tight budget you can use the loan to pay for costs such as permits, staffing, office space, and equipment.

4. Medical Expenses

Health insurance can only do so much. At times, you will find that your medical expenses have gone beyond certain insurance coverage amounts. When an unexpected medical expense occurs, a personal loan will come to the rescue.

5. Purchasing or Renovating a Home

Purchasing a home is a good way to use a personal loan. Buying a home is a good investment because as you make your mortgage, you build equity. Once the loan is fully paid, the house will be a valuable asset.

Personal loans are also used to pay for home improvement projects. It’s important to keep your home in good shape by doing preventive maintenance and repairing any problems that come up. For example, you can take out a loan to repair a leaky roof. This way you will be preventing further damage as well as increase the value of your home.