With one of the highest inflation rates in over 15 years, more people are struggling to make large purchases amidst soaring consumer prices. As reported in CBS19 News on American savings, nearly six in ten adults don’t have enough savings to cover a $500 or $1,000 unplanned expense. With this struggle in finances, around 20% of people said they would put large payments on their credit cards — which is not always the most affordable option in the long term.
As an alternative to credit cards, personal loans have become a popular way to get a lump sum of money repaid in installments. While the amount and repayment terms depend on your credit score and needs, all personal loans are viable options for non-discretionary expenses.
When you shouldn’t use a personal loan
Since personal loans can be used for almost any reason, they may tempt some to avail of non-urgent things. If your reasons for availing a loan include a vacation or investing when you don’t have savings, it may be better to reevaluate your cash flow. Our guest post by Kaylin Dillon on “Talking Money With Your Partner”, highlights the importance of discussing financial needs and goals, especially if you have a partner. For people having difficulty balancing their money, you can always consult with a financial expert at My Financial Coach, who can offer unbiased financial guidance based on your situation.
In addition to reassessing your finances, it’s crucial to stop incurring more debt than needed. If you already have many existing loans that you’re having difficulty paying off, another loan may lead to late payments, which can contribute to poor credit scores. Insights from Sound Dollar on how to get a personal loan with bad credit notes how it’s possible to get approved, but you are more likely to get worse interest rates, shorter repayment terms, or lower loan amounts than good-credit borrowers. To increase your likelihood of approval, you may need collateral through secured personal loans, but you also risk losing ownership if you default. When possible, it’s best to avoid these problems entirely by foregoing personal loans.
When should you take out a personal loan?
While having stable finances should be one of the main requisites, some situations may call for a personal loan, particularly in emergency situations like a loved one getting into an accident or your car breaking down. Here are some ways you can best use a personal loan.
Education and training
When it comes to tuition costs, some lenders may limit the use of personal loans to cover education, especially college education. But when it comes to short courses or training to help you advance your career, personal loans are good options to help you upskill. If you’re looking to make a career shift, it’s crucial to research your options and expected salary to see if the monthly payments are worth the potentially new and improved earnings.
Debt consolidation
Bankrate describes debt consolidation as a way to roll all your monthly payments into a single bill. A personal loan typically has lower interest rates than a credit card, so not only does this simplify your debt, but it also lowers your total payment and needed interest over the loan term. But as mentioned earlier, it’s crucial that you manage your existing debt well and not raise additional loans. Do keep in mind that you may be subject to fees like loan origination fees and prepayment penalties.
Home renovations
Much like investing in yourself, a home renovation personal loan is great for improving a home’s functionality or fixing any underlying issues. Some ways people upgrade their homes include modern fittings, electricity-efficient appliances, and better storage space— all of which may boost your quality of life and lower utility expenses. If you plan to sell your house in the future, a renovation can also increase a home’s resale value.
