There are certain situations and circumstances that will require filing for a personal loan. Some loans are meant for a specific purpose. Examples of these are auto loan for cars, mortgage loan for a new home, and student loan for college tuition.
A personal loan, on the other hand, can be used for any purpose. Some lenders will require you to inform them of the reason or use of the loan, but most of the time they don’t. As long as you have a valid and legal reason, you can qualify for a loan; and you can use the amount for any purpose you have in mind.
You have to be familiar with personal loans before you apply for it. First of all, it does not require collateral. A home loan will have the house as collateral while the auto loan will have the car. These loans are called secured loans. Without the collateral requirement, personal loans are unsecured loans. This means that the interest rate will be higher.
The following are some of the circumstances that call for a personal loan application:
A personal loan may be necessary to refinance a student loan.
A personal loan can provide financial relief in this situation. If your student loan has a high-interest rate of 6.8 percent, depending of course on the type of loan you were granted. It is possible for you to find a personal loan with lower interest rates so you can pay off the outstanding loans faster.
There is a downside to this though. If a personal loan will be used to pay off a portion or the entire student loan, you can no longer deduct your interest payments along with some other benefits that are part of a loan such as a deferment and a forbearance. If the balance is of a large amount, the amount of the personal loan may not suffice.
A personal loan can improve your credit score.
If you have a low credit score, a personal loan can help you augment it in three ways. First is when your credit report shows that all you have are credit card debts, a personal loan can remedy the “account mix” issue. Having diverse loans can be favorable to your credit score.
Another way is that it may lower the credit utilization ratio or the amount of the total credit you are using compared to the credit limit. The lower the total credit amount, the better your credit score. A personal loan will increase the total amount that is available for you to use.
A personal loan may also help you consolidate credit cards.
If you have one or many credit cards that are all maxed out, you can apply for a personal loan for you to consolidate all the charges into just a single monthly payment. This is a beneficial settlement since the loan’s interest rate is lower than the APRs or annual percentage rates on your credit cards.
A personal loan may also be used for home improvement.
Consider a personal loan to finance your home improvement project if this will add value to the home, especially if you have plans of selling it. You will not max out your credit card or pledge your home as an asset as you will with a home equity loan.
The following are more specific conditions for you to get a personal loan:
Get a personal loan when you want a loan with a fixed interest rate and monthly payment.
A personal loan’s greatest benefit is that it offers a fixed repayment schedule and interest rate. This means that you can agree altogether on a scheduled monthly payment ahead, and there are no surprising larger bills.
Get a personal loan when you have used a personal loan calculator to know your new monthly payment and you are certain that it is affordable.
Being qualified for a personal loan does not necessarily mean that you can afford to pay for it. That’s why it’s important to use a personal loan calculator to figure out what will be your monthly payment based on the amount you intend to borrow and the interest rate that you are qualified for.
You have to check on your budget and regular expenses and try to see if your loan payment will be difficult for you to comply with.
Get a personal loan when you have good credit, for you to qualify for a loan that comes with an attractive rate and beneficial loan terms.
The first thing you have to do is to boost your credit score. You can work on this by making sure that late bills are up to date and that all monthly payments are done on time. Your credit score will be improved when you pay off your debts and credit card balances. Keep in mind that these make up 30 percent of the FICO score.
After listing down all the possible situations that will require you to get a personal loan, it’s also useful to list down all the ridiculous situations that people mistakenly use their personal loans on.
Personal loans are better not used on medical expenses.
The only way for personal loans to make sense as payment for medical expenses is if you cannot find better payment terms from your doctor’s office or through your medical credit card.
Personal loans must not be used for discretionary spending.
A personal loan may be a convenient option, but it is an expensive financing option for unimportant expenses such as grand vacations and highly extravagant weddings. There is no other option but to save for your huge expenses early on. This will help you avoid finance charges altogether.
Personal loans are not good for emergency expenses.
Personal loans are cheaper and less risky than payday loans; however, these still have high-interest rates particularly for those who have bad credit. If you don’t have an emergency fund, you can check online for some payday alternatives.
Lastly, a piece of advice from the financial experts, if you are struggling to stay afloat and keep up with your debts, don’t apply for a personal loan.
For more information regarding personal loan visit Bugis Credit to find out how to get the best rates for personal loans.