Getting personal loans can seem a bit daunting, but these are helpful tools you can use to benefit your financial situation. With the right planning and a smart approach, you can create new opportunities for yourself by carefully leveraging personal loans. Here’s how to get them to work for you.
What is a Personal Loan?
Firstly, let’s define our terms. A personal loan is a type of unsecured loan offered by a bank or some other lender. It’s a one-time loan that gives you a specified sum and has specific repayment conditions over an agreed-upon time period. This makes it distinct from things like secured loans and lines of credit.
What is a Secured Loan?
A secured loan is a one-time loan in which the borrower offers the lender collateral of some kind, often a car title or the deed to their home. If the borrower defaults on the loan, the lender can repossess the collateral. These loans are useful for people with bad credit, as the collateral gets them more advantageous interest rates.
What is a Line of Credit?
A line of credit is also distinct from a loan in that it’s a continuous agreement that the borrower can take money from. These are often secured against assets like a home. Borrowers tend to use these for ongoing projects, such as a home equity line of credit used to pay for incidental expenses during a home renovation project.
Personal Loans can be Powerful Tools
A personal loan can be a powerful tool when used correctly. They’re extremely straightforward financial products. You borrow money, you pay it back for a preset interest rate over time, and your credit score gets better. It’s one of the easiest ways to bridge a shortfall in your finances, too.
Emergency Flexibility
First and foremost, having access to personal loans can help you while you’re building up your own personal emergency fund. They’re flexible in ways that many other financial products aren’t. The ideal way to use them is in response to emergency situations that you couldn’t predict and save up for.
Debt Consolidation
One of the main uses of personal loans is to consolidate your debts. That’s not as complex as it sounds, either. If you’ve got outstanding debt, such as credit cards and high-interest loans, you might be eager to roll them all together for a lower interest rate. That’s where debt consolidation loans come in.
Consolidating it All
It works like this. You shop for a good interest rate on a personal loan and then use the money from that loan to pay off all your outstanding debts with higher interest rates. Then, you just pay back that one bill, saving yourself the difference in their interest rates across the life of the loan.
Medical Bills
You can’t help when you get sick. It’s not up to you whether or not you need to see the doctor! Since the state of the health insurance agency is so uncertain for many people, personal loans can be one of the most sustainable ways to cover unexpected medical expenses.
Out of Pocket
Often, even if you have health insurance, you’re still on the hook for the difference between your deductible and your out-of-pocket costs. Sometimes it’s easier on your budget to just spread the payments out by using a personal loan rather than dealing with the hospital’s often-unpleasant repayment policy.
Wedding Costs
Everyone wants that perfect wedding, right? Well, it can be a bit expensive to make the day perfect. A personal loan can be used to soften the blow a bit, helping pay for things like catering, photographers, DJs, and the venue’s fees.
Unwanted Surprises
Sometimes, you might perfectly budget out your wedding and then a last-minute issue with the venue means you need to go somewhere else for the wedding. In these scenarios, you might not be able to scrape together enough money to cover the difference without tapping into a personal loan.
Appliances
Some people like to use personal loans to buy appliances. If your fridge or washer goes out, you’re not exactly going to want to wait to save up and replace it. Your house needs these appliances, so getting a loan to secure a reasonably priced replacement is very responsible.
Buying a Car
You don’t have to use the auto financing offered through a car dealership if you want to buy a car. You’re within your rights to borrow money using a personal loan and use that to buy yourself a new or used car. Depending on your financial situation, this could help you secure a much better interest rate than the financing offered by a dealership’s lending partner.
College
While there are specific loans dedicated to covering college expenses, personal loans can help bridge the gap for some incidental expenses you might not have covered with your student loan. Sometimes, you just need a new laptop or a few textbooks. If you can’t afford them out of pocket, a personal loan can be a great way to get ready for the new semester.
Other Educational Programs
Sometimes you also can’t use a student loan on a given educational course. Some certification programs or vocational schools aren’t eligible for student loan programs, making it a bit trickier for people to afford them. A personal loan, however, can get you the up-front cash you need to secure the education you want.
Vacation Loans
Sometimes you just need a vacation. But saving up for a vacation can be tough, especially if you’re on a tight budget. One way to get away from it all can be to get a personal loan to cover your travel and lodging expenses.
Plan Your Budget
Just make sure you know you can afford to pay the vacation loan back without an undue strain on your finances. Vacations are nice, but you don’t want to end up in dire financial straits just because you wanted to spend a week lying on the beach drinking out of a coconut.
Small Business
It’s not easy starting a small business. Many people with a great idea for a small, self-owned business venture don’t quality for a traditional business loan. You can use a personal loan to cover some smaller startup costs to help you move your business into a more profitable situation and become eligible for larger business loans.
Read More: 10 Things to Know Before Taking Out Student Loans for Your Kid
Breaking a Different Loan Cycle
Payday loans have much higher interest rates and shorter terms than personal loans. If you’ve been using smaller payday loans to cover your expenses and build your credit, you can break the cycle of paying exorbitant interest rates by using a personal loan to pay yourself out of the payday loan and gently get yourself back to a neutral financial footing.
Read More: 10 Things to Know Before Taking Out Student Loans
Be Responsible
Remember, you have to pay back what you borrow plus interest. Make a plan before you borrow any money and make sure you can afford the extra expense to pay the loan back. The sooner you pay it back, the less you’ll have to spend on the interest rate. When used well, personal loans can be a huge help for your finances.
Read More: 10 Questions to Ask Before Taking Out a Personal Loan