When Should You Apply for Personal Loans ? Is It a Good Idea to Do So ?

Depending on the circumstances, getting a personal loan can be a very good step to take. However, we can't go on to clarify our previous statement unless we define what a Personal loan means.

Is It a Good Idea to Get Personal Loans?

A Personal loan is any loan that is collateral-free and can be used to settle any type of bill, debt or any other purpose. From repaying a monetary debt to buying assets to going on a vacation, there is pretty nothing you can't use a personal loan for. This is the biggest difference between personal loans and other types of loans. Furthermore, a personal loan is always repaid in installments within a specific period.

Although personal loans are flexible and can serve different purposes, there are many reasons why you should only get them when you have to. As a result of this, we would be discussing situations when taking a personal loan is a good idea. We would also discuss the pros and cons of taking personal loans.

When Should You Apply for Personal Loans

1. For academic and career pursuits

Of all the things you can consider getting a personal loan for, this is the most important of them all. Student loans can only cover tuition fees which means that they are only good if you are studying in a college or university in your state or country. For students planning to study abroad, taking a student loan is not enough to cover the full expenses. Personal loans, on the other hand, can be used to pay tuition, as well as cover other miscellaneous expenses like accommodation, feeding, etc.

2. Housing Purposes

This is another reason to take personal loans. Taking a personal loan to buy a house or lease a house is better than taking a mortgage or home loan. the main reason for this is because you will not have to use the house in question as collateral. Besides being a collateral fee, the term of repayment of the personal loan will be shorter than that of a home loan

3. To consolidate your credit cards

Having credit card dues accumulate can be very bad. This is because the interest rates are usually a bit high. Interest rates of personal loans, on the other hand, is lower than that of credit card dues. To reduce how fast your credit card dues increases, you can take a personal loan to pay it off.

Do note that doing this does not clear the debt. Instead, it only renews the debt differently. So that instead of having a debt that is two months old, you now have a debt that is only a few hours old.

4. Boost Credit score

While this is not enough reason, it can very useful for future purposes. A credit score is what banks or lenders consider before deciding if you can pay off the money you want to borrow.

Taking small personal loans and paying them off in due time will increase your credit score.

5. Medical emergencies

No one can plan or emergencies such as accidents or fire right? On rare occasions that they do occur, having money can be crucial in saving your life or that of a loved one through medical assistance. Getting a personal loan to fund medical treatment is a good enough reason.

6. Financing Marriage

Marriages and honeymoons can sometimes be expensive to plan. While spending some of your hard-earned savings on it is an option, it does not mean you have to. You can simply finance your marriage and honeymoon by taking a personal loan.

7. Vacations

Though it is not advisable, you can also finance vacations and foreign tours with personal loans. Provided you have a strong credit score to back you up, you can take a loan to go on your dream vacation.

Pros and Cons of Personal Loans

Advantages of Personal Loans

1. Versatility

This is the main reason why personal loans are very viable options. This is because unlike other loans like mortgage, car or student loans, you can apply for a personal loan and use it for different purposes. You can use choose to use your loan for anything that ranges from:

- Settling medical bills;

- Paying for your dream vacation;

- Consolidating credit card debt;

- Paying for car repairs; etc.

While you can use your loan for anything you want, you do not have to. Reasons for this statement are explained later under the cons of taking personal loans

2. Decent Interest Rates

Personal loans do not only have favorable loan rates, but they also do not require you to have any collateral. This makes personal loans much more favorable compared to a mortgage that requires you to collateralize your house. In other words, if you do not have any valuable property to collateralize, a personal loan is the best option for you.

Also, interest rates on personal loans usually go back and forth between 6 and 7 percent.

3. Personal loans are offered by various lenders

This is another edge personal loans offer over other types of loans. There are lots of non-bank lenders from whom you can borrow personal loans at a decent fixed interest rate. Some of these non-banking lenders include SoFi, LendingClub, etc.

You can also borrow personal loans at Traditional and online banks as well as a credit union.

4. Fixed monthly payments

If there is another reason personal loans are better than other types of loans, the fixed interest rates they come with.

Monthly payments of other loans differ a lot because of the ever-changing interest on the borrowed money. However personal loans do not have changing loans. Personal loans give you the full chance to settle your debts with ease.

5. Guaranteed quick loan approval on the desired amount you need

Personal loans depend a lot on credit score. Once your credit score is calculated, you can borrow the max amount of money your limit can command.

Once the calculation of your credit score is complete, approval usually takes about a month or two. Depending on how high the amount you need is, you can get the loan money deposited in your account within two or three days.

Disadvantages of Personal Loans

1. Can easily get you trapped in a Debt cycle

This is the biggest con attached to taking personal loans. The reason for this is because personal loans let you repay with ease. Many personal loan terms usually have a repayment period of about 12 months to 7 years. How long the term depends on your credit score and the lender.

This long repayment term simply gets you trapped. Why? Because you can take personal loans to repay old debts or clear credit card debts. In other words, unless you need a personal loan for something really important, you can get yourself in a debt cycle.

2. Higher, though fixed, interest rates

Mortgage or home equity loans have relatively low-interest rates though they are not fixed. However, irrespective of the borrower you get your credit or personal loan from, the rate is always high.

Most of the time the interest rate advertised by banks and other lenders is their best rate for people with the best credit score. This means unless your credit score is as good as the credit score the bank or lender wants, you will get a high but fixed interest rate.

As if that is not enough, the personal loan comes with prepayment penalt ies. The prepayment penalty is a fee charged if you pay the personal loan off early. To make things even worse, the larger the loan you pay of early, the bigger the additional fee you have to pay on it.

3. Origination fee is required

While one of the advantages of taking personal loans is the lack of collateral, it is added to its disadvantages. Before you can, however, take a personal loan, you need to pay an origination fee. This fee is only about one to six percent of the amount you want to borrow. The origination fees are very important because you need it to cover the cost of processing your loan.

Depending on the bank or lender, the money might be rolled into the amount you want to borrow or removed from the amount sent to your account.

4. Personal Loans attract scammers

Lastly, personal loans attract scammers. Scam is a very popular thing in the world of personal loans. Many individuals have fallen victim to a scam by ignorantly giving dubious lenders details of their prepaid debit card.

You have to verify if the lender is accredited and legitimate. One way you can do this is by checking the BBB (Better Business Bureau) website. Another way is to check if the lenders are registered in the state their office is located. The easiest way to check is to check for information about the lender on their website. you can also contact the office of the attorney general in your state.