Life’s full of twists and turns. The uncertainties that come with it always leave us in dire need of money. If you’re a salaried employee or own a business, you may require financial requirements with no forewarning. You might have the funds; however, some situations can leave you with the necessity of additional sources of funds.
Here, taking a personal loan can prove to be the better option. It’s not nearly as common as credit cards to borrow money through personal loans. Approximately 65% of Americans used credit cards in 2016, compared to 10% who used personal loans, according to the Federal Reserve.
Despite this, their popularity is on the rise. The number of personal loans issued in the United States increased by double digits every year between 2014 and 2017, reaching a record high of $107 billion by mid-2017, according to TransUnion.
What is a Personal Loan?
A personal loan can allow you to borrow an amount of money to repay with interest within an agreed time frame. You can borrow these loans from banks or any other lender. Most of these loans go from two to five years, with others going from as little as one to seven years. Click here to know about personal loans.
There are two major types of personal loans:
- Secured Personal Loans — In a secured loan, you pledge property or cash as collateral. For example, your house, your car, or a CD or savings account might be collateral. Banks may seize the collateral if you cannot pay your loan.
- Unsecured Personal Loans — Most personal loans are unsecured – and do not require collateral to support them. In place of this, the bank evaluates your financial history to determine if you qualify for the loan. Banks charge higher interest rates on these loans because they are riskier for them.
Why do people take personal loans?
People take personal loans for various reasons. The most common one includes:
- Unexpected expenses
Many unexpected expenses arise now and then. These expenses may include a major car repair or a hefty medical bill can derail your financial situation. It would be best to have a source of emergency funds that can cover such expenses. However, if you’ve exhausted them, a personal loan can be your preferred choice that can turn your substantial one-time expenditures into small manageable payments.
- Home repairs and improvements
A home equity loan could allow you to make repairs or upgrades to your home. However, you can also get a personal loan. The equity in your home is an excellent option for funding home improvements, but equity loans are secure and use your house as collateral. In addition, Covid-19 has led some lenders to tighten their HELOC lending requirements.
Personal loans are an excellent alternative for people who don’t want to risk losing their homes if they fall behind on payments. Receiving a personal loan might be quicker than one for home equity.
- Debt Consolidation
If you take out a personal loan to consolidate your debts, you will borrow an enormous amount of money and then make payments on your credit cards, student loans, and auto loans with that money.
It is easier to manage your finances if you merge your debts because you only have to keep track of one monthly payment rather than paying various creditors. In addition, you may save money if the interest rate on the loan is lower than the interest you paid on your other debts.
- Wedding Expenses
Weddings are a considerable one-time expense. Even though most people don’t recommend it, they prefer to pair down what they want to fit their budget instead of raising their funding to match what you want.
If you opt for credit cards, you’ll have higher interest rates compared to personal loans. The best personal loans are affordable to borrow if you need the money to cover your wedding expenses.
- Vehicle Financing
You can get auto loans to finance the purchase of a car. However, you can also get some of the best personal loans for vehicle financing. Most auto loans have lower interest rates but use the vehicle as collateral. If you’re worried about skipping your payments schedule and getting your car repossessed, a personal loan might be your best option.
Take the time to consider all your options before applying for the best personal loan of your choice. Borrowing money should never be impulsive.
It would be best to examine your financial situation to determine whether a personal loan makes sense.