Should you borrow money? Does your financial situation justify a personal loan, or should you try to avoid any debt at all costs?
These types of questions often go through the minds of folks who are contemplating applying for personal loans irrespective of the expense. While there can be considerable benefits of a personal loan, any type of loan also brings certain risks and trade-offs that are important to consider. The big question is this one: what qualifies as a “good reason” for getting a personal loan, versus a situation where the risks outweigh the benefits?
What to Consider When Thinking about a Personal Loan
Before we get to the specific scenarios in which applying for a personal loan would be a smart financial decision, let’s address some of the trade-offs above that you accept when you sign on the dotted line for a personal loan.
Remember that any personal loan is a debt, in the form of borrowed money that you must pay back over time. When you get approval for a personal loan, you receive a lump sum of money upfront to use for a likely sizable expense. In exchange for the convenience and ability to pay your expense, you pay back the loan in monthly installments over an agreed-upon period. In addition to paying back the loan amount itself (the principal, as it is known in the financial world), you will also need to make interest payments on the loan (which make it worthwhile and profitable for your bank or lender to give you money). Due to these interest payments, you will eventually spend considerably more money to pay off the personal loan than you received upfront.
This interest payment factor is the most significant and obvious trade-off of getting a personal loan, but there are others, as well. Most personal loans require origination fees, which you will need to pay upfront. Getting a personal loan also affects the amount of debt that shows on your credit report, which is worth considering if you are thinking about, say, applying for a home or auto loan at some point soon.
Top 5 Reasons To Get A Personal Loan
While personal loans involve interest and credit impacts, they also have several potential benefits. For instance, credit history standards aren’t typically as high for personal loans as they are for some other types of lending. Personal loans also offer more versatility than most loans (mortgage loans and auto loans, for example, are intended for particular purposes). These loans provide both reasonable interest rates and flexible repayment timelines (from 1-7 years, depending on your credit and your lender).
Furthermore, there are indeed situations where getting a personal loan will be the best option available to you. Here are a few scenarios in which you would have a perfect reason for pursuing a personal loan:
- You are facing a significant unplanned expense. Probably the most apparent reason to consider a personal loan is if you are facing a considerable unforeseen or emergency expense. Perhaps you or a family member has fallen ill or been grievously injured, and you are facing medical bills beyond what you can afford. Maybe a parent passed away recently, and you are planning their funeral. Perhaps your home was damaged by a storm, and you need a loan to pay for what the insurance won’t cover. These situations are challenging to plan for, which makes affording the associated expenses a considerable burden. A personal loan can help.
- You need to consolidate debt. One of the best reasons to get a personal loan is to consolidate other existing debts. Let’s say you have a few existing debts to your name—student loans, credit card debt, etc.—and are having trouble making payments. A debt consolidation loan is a type of personal loan that can yield two core benefits. First, you boil all your disparate debts down to a single loan, making it easier to keep track of and pay on time. Second, you may be able to replace high-interest debts with a lower interest loan, which can cut down on how much interest you pay in the long run.
- You want to do a home remodel. If you want to renovate your home but don’t have much cash on hand, you might consider a personal loan to help finance those activities. If a remodel is going to make your home a more ideal living space for you and your family, it qualifies as smart use of personal loan money—especially when weighed against the option of buying a new home and looking at a full mortgage.
- You are considering a large purchase. This one could go either way, depending on the expense in question, how big of a loan you’d need to cover that expense and your game plan for repaying the loan. A “major expense” could be anything from a new refrigerator to a dream vacation to your wedding budget. In each scenario, you need to weigh how essential the expense is. For instance, if your freezer breaks, you probably need to get a new one—whether you can afford to do so out of pocket or not. With a wedding or a trip, the pros and cons are more difficult to weigh, as there are likely opportunities to reduce expenses. Still, there’s also something to be said for investing in great life experiences that you’d remember forever. Ultimately, you’ll need to decide for yourself whether a major purchase justifies a personal loan or if you’d rather look at other options—such as waiting a year to take your dream vacation and saving up money in the interim.
- You need to build credit. Did you know that there is a type of personal loan—called a “credit builder loan”—that you can use to establish a payment history and build your credit? If you have poor credit or little to no credit, building up your credit history can indeed be a good reason to take out a personal loan.
Where Do I Get A Personal Loan?
At Resource One Credit Union, we offer a variety of different personal loan options, including line of credit loans, consolidation loans, savings secured loans, and credit builder loans. Contact us today to learn more about these loan types or to discuss the potential benefits of a personal loan.