Contrary to popular belief, taking a personal loan isn’t always a bad idea. In fact, obtaining a personal loan can be a smart financial move in order to take advantage of lower interest rates or to increase your credit score.
What is a Personal Loan?
A personal loan is different than other types of loans for two reasons:
Personal loans can be for any purpose.
Unlike auto loans, student loans, or mortgages, personal loans are not designated for a particular purpose. A borrower can take a personal loan for any reason at all. Often, lenders don’t even ask why you want the loan.
Most personal loans are unsecured.
Unsecured means that borrowers don’t have to put up collateral to obtain the loan. The lender takes all the risk without requiring the borrower to pledge a home or car in lieu of payment if they default on the loan.
Why Should I Choose a Personal Loan?
Reasons You May Need a Personal Loan
There are many reasons you may need a personal loan. Here are some common examples:
Paying for a Major Life Event
Some opportunities come along only once in a lifetime. A wedding, new baby, or educational opportunity might qualify as a major life event. You may not have the cash to cover these expenses at one time but could easily adjust your budget to accommodate a monthly payment for 12 to 60 months, the usual terms available for personal loans. A major life event is a great reason to apply for a personal loan.
Financing a Car or Home Repair
If your vehicle is in need of repair, you don’t have a lot of options. You need safe and reliable transportation to get to work or to take your children to school. A personal loan is a great solution to your automotive repair problem. You can get your vehicle repaired now—when you need it—and pay the personal loan back over time.
Similarly, if a major appliance—refrigerator, washing machine, or air conditioner—goes out, a personal loan likely has a lower interest rate than in-store financing. So you can repair or replace that big ticket item immediately and pay off the personal loan in monthly installments.
Consolidating and Paying Off High-Interest Debt
Paying bills is a chore. If you’re not very careful, you can forget to make a credit card or payday loan payment, especially if their due dates are scattered throughout the month. Consolidating your credit card and other loan debt into a single account can ensure you make one monthly payment, increasing the likelihood you may your payment on time.
In addition, credit cards and payday loans are often subject to higher interest rates than personal loans. Do your due diligence by comparing interest rates from several lending institutions. Then consolidate your high-interest debt with a personal loan that suits your budget.
Improving Your Credit Score
Your credit score is calculated using various data, including your ability to pay your bills on time and the diversity of your debt portfolio. If you have very little credit history or only credit card history, a personal loan is a convenient way to build credit and raise your credit score. Simply take out a small personal loan and make monthly payments on time. These actions will prove to lenders that you can be trusted to make timely payments toward paying off multiple types of debt.
Other Reasons for Choosing a Personal Loan
A personal loan is a viable option in certain circumstances. Some reasons to choose a personal loan include:
You don’t have a credit card, or the interest rate is high.
Your credit card limit doesn’t meet your needs.
You need extra money for a one-time event.
You are expecting a pay raise or windfall soon.
You don’t have collateral.
Choosing to take a personal loan is a personal decision. Always weigh your options. And when you’re ready to speak with a professional loan officer, come to AMG Finance. We can help you determine if a personal loan is right for you.
