Everyone comes across times in their lives when they could use a little financial help. Even the very best of us experience situations where we don’t have the cash on hand to cover the costs necessary. This could be due to financial hardship, an unexpected emergency, or a particularly large purchase.
Borrowing money is absolutely nothing to be ashamed of. However, it is important to weigh all your options carefully when deciding if you ought to borrow money or not. Depending on your method of funding, you may want to be more selective in your reasons for borrowing, as some can cost you more than others.
Determining When To Borrow Money
If you are borrowing money from a friend or family member, there is not too much to be concerned about other than how the financial aspect might affect the relationship. You likely don’t need to be concerned about an interest rate or origination fee.
On the other hand, when you borrow money from a financial institution, you will want to be a bit more selective about what qualifies as a good enough reason to get funding. Getting a personal loan can be an excellent way to obtain financing when you need it. However, personal loans aren’t something you can get at the drop of a hat every time you don’t have enough money. Nor should you.
You will want to have a good reason to get a personal loan. Wanting to buy the latest flat screen or a brand new iPhone should not qualify as a great reason for applying for a personal loan. A personal loan will appear on your credit report, therefore having an impact on your financial future. Borrowing money costs money through interest and fees when it’s not a loan from a friend or family member.
Personal Loans for Borrowing Money
One of the best aspects of personal loans is that there are many different kinds of them. When you need to borrow money for a specific reason, there is an abundance of online lenders who offer personal loans for you to choose from.
Personal loans are typically unsecured and repaid in monthly installments. Most lenders don’t need to know how borrowers plan to use the money, which makes them incredibly versatile. Lenders often accept a wide variety of credit scores depending on the personal loan type. However, if you have poor credit, be prepared to pay higher interest rates, especially if it is an unsecured loan.
Bad Credit Options
A common type of personal loan for individuals with poor credit are fast payday loans online. Payday loans are small short-term personal loans meant to cover your necessary expenses until your next paycheck. Payday loans are extremely high-interest debt and should only be relied upon as a last resort.
Typically a payday loan needs to be repaid in a single lump sum when you next get paid. This can be difficult to afford with such high-interest rates. You will need to be sure you can afford to pay off the personal loan according to the payment plan before you borrow money with a bad credit score.
Another excellent option for borrowers with poor credit in need of a personal loan is to get a secured loan. Secured loans are borrowed against collateral which reduces the risk for lenders as they can claim the equity in the collateral if the loan is defaulted on. It will be possible to get a lower interest rate when a loan is secured versus unsecured.
Credit Cards
Some borrowers prefer to borrow money through revolving credit so they can keep up with unexpected expenses as they present themselves. Credit cards typically have pretty high-interest rates because, like personal loans, they are unsecured. Credit card debt is tricky because it can be tempting to rely on your cards too much. You don’t want to build up too much debt to pay back.
Good Reasons To Borrow Money With a Personal Loan
If you are taking on any kind of interest-bearing debt, financial experts will recommend that you have a good reason for borrowing. Weighing your options carefully and having a specific purpose for taking on debt will ensure that you do so sparingly.
Here are a few excellent examples of good reasons to borrow money through a personal loan:
Last Resort In an Emergency
Unexpected expenses can pop up at the most inconvenient times. Unfortunately, emergencies don’t wait until your financial situation is stable. If you don’t have the cash to handle an emergency expense, a personal loan could be your best option. However, after you’ve paid off your personal loan, consider saving for an emergency fund, so you don’t have to turn to high-interest debt in the future.
Vehicle Financing
An incredibly common reason to borrow money is to finance the purchase of a car. An auto loan works very similarly to a personal loan, except it is secured, which means it can be easier to get lower fixed interest rates. Auto loans are secured through the use of the car’s equity value as collateral. Borrowers who don’t make their car payments on their auto loans risk losing their vehicle through repossession.
Debt Consolidation
When credit card debt becomes too much, borrowers often use a personal loan to consolidate debt so that they can simplify their monthly payments and reduce their interest rate. Consolidating debt is an excellent reason for obtaining a personal loan, especially if you are able to save money through lower interest rates. If you are primarily looking to turn your many monthly payments into one payment a month, you might also want to look into a balance transfer credit card.
Home Improvement or Repairs
Another reason an individual might decide to obtain a personal loan is to cover home improvement or repair costs. Borrowing money to cover moving costs and the improvements you need to make when you first move in by applying for a personal loan can make your move possible when you’re in a hurry. Some home repairs can be put on hold until you save money to pay for them, but not all of them can wait. If the heating furnace breaks down, a personal loan might be the only option to get it fixed by the time winter arrives.
Tips for Handling Your Personal Loan
Before taking out a personal loan, it is important to have a plan as to how you will repay it. Personal loans work incredibly well for borrowing money as long as you handle them responsibly according to the repayment terms outlined in the loan agreement.
Here are a couple of tips for managing your personal loan to improve your finances:
Make Your Monthly Payments On Time
Always complete your monthly payment on time. Late payments will negatively impact your credit score and possibly incur late fees. Damaging your credit score by missing your monthly payment could harm your chances of obtaining funding in the future or increase the average APR you qualify for.
Check Your Credit Report
Check your credit history to catch any issues or inaccuracies as you are paying off your personal loan. Checking your credit regularly will help keep it in good shape while you are paying off your debt. You can request a free annual credit report from each credit bureau to keep track of all the changes each year.
Pay Off the Loan Early
If your lender doesn’t charge prepayment penalties, paying off your personal loan long before it is due to be paid off could save you a significant amount of money on interest. Paying off your loan early will ensure no late or missing payments and build your credit score, increasing your overall financial security and health.
Create an Emergency Fund For the Future
After paying off your personal loan, your best next move is to start saving money for an emergency fund. Having an extra chunk of cash on hand whenever you are hit with an unexpected expense is one of the best things you can do to protect your future income. With a savings account dedicated solely to emergency expenses, you will no longer need to borrow money to cover costs that aren’t accounted for in your monthly budget.
When taking on new credit, it is always important to consider the whole picture rather than just how to go about getting the funding you need. You want to go into any big financial decision with a plan so it will benefit you in the long run rather than causing you further financial stress. When you have a plan, you are less likely to be caught off guard or find yourself in debt that you don’t know how to get yourself out of.
References:
6 Good Reasons To Get A Personal Loan | Forbes Advisor
