Personal loans can come in handy for a variety of purchases, but you may hesitate to apply because you do not know all of the benefits or personal loan uses. As soon as you know those, you will see all the reasons a personal loan can work for you.
Benefits of a personal loan
Some of the benefits of having a personal loan are...
- Helps build credit
- Allows borrowers pay for purchases over time
- Makes it easy to consolidate debt
- Can be used for almost anything
- Eliminates the need for collateral
- Lower interest rates and higher borrowing limits
- Easy to manage
- Predictable repayment schedule
1. Helps build credit
Taking out a personal loan requires making regular, monthly payments toward the outstanding balance. Lenders typically report your payment record to the three major credit bureaus—Equifax, Experian and TransUnion. If you consistently make on-time payments, this can help increase your credit score.
2. Lets borrowers pay for purchases over time
Lenders disburse personal loans as a lump-sum payment that you can use to make a purchase or pay off another debt. This enables borrowers to make large purchases and then pay for them over time, without saving money in advance. While this can be a good strategy for necessary purchases, it may become dangerous if you rely on loans too much to cover other discretionary spending. For tips on avoiding this and other bad financial habits read our blog Debt management: Breaking Bad Financial Habits.
3. Makes it easy to consolidate debt
Debt consolidation loans let borrowers streamline their finances by paying off individual loans and credit card balances with a single personal loan. Not only does this reduce the number of payments you have to remember each month, but it may also result in a lower overall interest rate.
4. Can be used for almost anything
Personal loans are a popular financing option because they are versatile. You can use them to cover everything from auto repair costs to home improvements and event-related expenses, like weddings.
Acceptable loan uses vary by lender, but most institutions allow borrowers to use funds for any personal, family or household purposes. If you are not sure, just ask!
5. Eliminate the need for collateral
Most personal loans do not require the borrower to pledge any collateral. This means you will not have to risk losing a valuable asset—like your home or car—if you default on the loan. However, keep in mind that unsecured loans typically come with higher interest rates and may be more difficult to qualify for because they pose more risk to lenders.
6. Lower interest rates and higher borrowing limits
Personal loans often come with lower interest rates than credit cards. As of February 2021, the average personal loan rate was 11.84 percent, while the average credit card rate was 15.91 percent. Consumers with an excellent credit history can qualify for personal loan rates in the range of 6 percent to 8 percent. You may also qualify for a higher loan amount than the limit you have on credit cards.
7. Easy to manage
One reason people take out personal loans is to consolidate debt like multiple credit card accounts. A personal loan with a single, fixed-rate monthly payment is easier to manage than several credit cards with different interest rates, payment due dates and other variables.
8. Predictable repayment schedule
Personal loans are installment loans with fixed interest rates, repayment terms and monthly payments. At approval, you will learn precisely how much you will need to repay each month, how many monthly repayments you will need to make and your total interest cost over the life of the loan.
Revolving credit lines, such as credit cards and home equity lines of credit, are not so predictable. The only constant is your monthly payment due date; your required minimum monthly payment depends on your credit utilization, and your interest rate is subject to change with benchmark rates.
Personal Loan Uses
Now that you understand personal loans the benefits, let us look at some ways you can use a personal loan.
- Debt consolidation
- Alternative to payday loans
- Home remodeling
- Moving costs
- Emergency expenses
- Appliance purchases
- Wedding expenses
- Vacation costs
1. Debt consolidation: Using a personal loan to pay off high-interest debt, like credit card debt, allows you to consolidate multiple payments into a single payment with a lower interest rate.
2. Alternative to payday loans: Personal loans are cheaper and safer than payday loans.
3. Home remodeling: A personal loan can help you fund a home improvement project if you do not have equity in your home or do not want to borrow with a secured loan.
4. Moving costs: If you cannot immediately afford all the expenses associated with a long-distance move, a personal loan can help you cover those costs.
5. Emergency expenses: Because they can be disbursed quickly, personal loans are an effective way to cover an emergency or unexpected expense.
6. Appliance purchases: A personal loan can help you get new appliances as soon as you need them.
7. Wedding expenses: A personal loan can help you finance wedding expenses upfront, which can help you avoid dipping into your savings or emergency fund.
8. Vacation costs: If you are comfortable paying off your vacation for several years, a personal loan can help you get to your dream destination.