When Does it Make Sense to Take a Personal Loan?
- September 15, 2016
- Posted by: Jeff Gitlen
- Category: Personal Loans
It is a rare person who can handle all of life’s unexpected financial emergencies easily. For most people, having a crisis hit can be devastating to their finances. From major house expenses to medical bills or paying for car repairs, there are times when it may be necessary to go into debt to get through a bad situation. If your monthly income won’t cover these expenses, a personal loan may the best solution.
Personal Loan Basics
A personal loan is a loan that you can use for just about anything, from a vacation to medical expenses to debt consolidation. When you take out a personal loan, you receive the full amount of the loan. You then make fixed monthly payments for the time period specified in the loan, usually from two to five years. Most personal loans have fixed interest rates, and there usually is not a penalty for paying off the loan early.
For secured loans (i.e., loans where you put up collateral, like a car), interest rates are often far lower than credit card rates. Unsecured loans will typically have a higher interest rate, but these rates may still be lower than those offered by credit card companies. Most personal loans are unsecured, including those offered by Discover Financial Services.
Personal loans often offer interest rates lower than those offered by credit card companies. They are a different kind of debt than credit card debt, which is important when it comes to building your credit score. If you need a large amount of money and more time to repay it, then a personal loan is often a better choice than a credit card. Over time, a personal loan with a
Being Responsible With Personal Loans
A personal loan can be used for just about anything, but that does not mean that you should use them for anything. Ideally, personal loans would only be used for true financial emergencies — when there are no other options. Managing your personal loan responsibility will help you continue to build good credit and ensure that you do not sink further into debt.
Start with a small, manageable loan that is only as much as you absolutely need. This will help to ensure that you are able to pay back the loan on time — or even ahead of time. Remember that you will not only be paying back that principal
Before signing the loan, make sure that you understand all of the terms of the loan, including any fees and the type of interest rate. Some lenders charge fees for repaying the loan early, or have hidden fees that may surprise you a year into repayment. Read the documents carefully, and ask questions about each of the terms to make sure that you understand it completely. Once you’ve taken out the loan, stick to the repayment schedule. Pay on time each month, and if the terms permit it, pay extra each month. This may reduce the overall amount that you owe, and make the term of the loan shorter.
Personal Loans for Debt Consolidation
Personal loans can also be used to pay off your debt. Although it may not make sense at first glance — taking on debt to pay off debt — if the interest rate on a personal loan is lower than your other types of debt, it may make sense.
With a debt consolidation loan, you can pay off all of your debts with a single personal loan. This could include medical bills, balances on credit cards and more. Loan interest rates are determined by your credit history and whether the loan is secured or unsecured, and are usually fixed for the life of the loan. This is in contrast to credit card rates, which can vary significantly, particularly if you make late payments. If you are approved for a debt consolidation loan, you’ll make fixed monthly payments for the loan term (usually two to five years). Making a single payment each month may be particularly helpful for anyone who has a hard time keeping up with multiple payments on different debts.
Personal loans are not the best solution to every financial problem. But in limited situations, responsibly managed personal loans can be a useful tool to meet a short-term need or to get out of debt.