Excluding mortgages, the average American has about $38,000 in debt. Understandably, you may want to avoid such high amounts of debt, but it’s not always a bad thing.
For instance, some debt can be beneficial when you want to go to university, or need some funding for a milestone in life. So long as you handle your debts wisely, then taking out things like a personal loan can be worth it.
Are you wondering: should I get a personal loan? Then keep reading. We’ll discuss what a personal loan entails and when it’d be a good idea to apply for one.
What Is a Personal Loan?
Personal loans are a type of installment loan. Installment loans are ones where you borrow a certain amount of money, then pay it back within a certain time frame, plus interest.
A personal loan is usually a long-term one; it normally takes at least a year to repay, with some repayment terms ranging up to 7 years. Once you’ve paid back the full amount (plus interest), your line of credit is then closed.
If at the end of your loan, you need to borrow more money, you’ll have to reapply for a new personal loan. You can’t just add to the one you’ve already paid off.
Types of Personal Loans
Lenders like Money Trumpet loans let you borrow anywhere from a couple thousand to tens of thousands or even hundreds of thousands of dollars! Not just that, but they give you the choice between 2 types: secured and unsecured.
With secured loans, you’ll have to provide collateral; you can use your savings account or a certificate of deposit (CD). Because you have collateral down, this means you’ll get better interest rates. This is because the lenders have less risk when deciding to lend you money.
On the other hand, you don’t have to provide collateral with an unsecured loan. So as you can guess, the interest rates will be much higher.
Most personal loans are of the unsecured type. It’s the better choice if you either don’t have collateral or are afraid of losing whatever you may have to use as collateral.
You can usually get personal loans from financial institutions such as banks, credit unions, online lenders, and even peer-to-peer lenders. Expect interest rates ranging from 5% to 36%, depending on your credit score, where you apply, and what type of personal loan you want.
When Are Personal Loans a Good Idea?
Now that you know what personal loans are, the types available, and the terms surrounding them, it’s time to look at which circumstances make them a good idea to apply for. Keep reading to find out when it may be advantageous to have funding from a personal loan.
When You Need Cash Quick
You may have heard that when you need cash quick, you should avoid payday loans. While yes, you can get money in your hands in a flash, the interest rates associated with this type of loan are usually sky-high. So for many, it can turn into a vicious cycle of borrowing to pay off current debts and bills, racking up more debt, and borrowing more to pay it off.
Personal loans may take slightly longer to get, but at least you won’t be paying up to 400% in interest. It may be worth it to wait a little bit and apply for a personal loan instead of a payday one.
When You Want to Consolidate Your Debts
If you’re like many Americans, you probably have multiple lines of credit open. A few credit cards here and there, and it can get hectic to keep track of. Not to mention, you probably have some less than ideal interest rates on them.
In the majority of cases, a personal loan will have a much lower interest rate than your credit cards do. So a personal loan can enable you to pay off all those balances. In the end, all you’ll have to worry about is paying off the personal loan, which will have lower repayment terms.
You Need a Home Remodel
Home remodeling doesn’t come cheap; chances are, you don’t have 100% of the funds to put in new carpet, get new roofing, revamp your kitchen, and/or upgrade your bathroom.
In that case, you shouldn’t have to wait to accumulate the money. Not only are remodels necessary for an aesthetic upgrade, but also for safety reasons. By taking out a personal loan, you can tackle this project promptly and ensure your family has a safe place to live.
You Need to Make a Large Purchase
Perhaps your stove’s broken down, or you’ve started a new job and need a car to get to and from work. If you don’t have the savings to make these big purchases, you may be spending more money in the long run. For example, you might have to eat out more, or take the bus or Uber to get places.
In these cases, a personal loan can give you the push you need to get a better footing in life. By making the large purchase you need at the moment, it can actually save you money in the long run.
Should I Get a Personal Loan? It Depends
As you can see, there’s not a single right answer to the question: should I get a personal loan? Depending on your personal circumstances and your needs, it can either be a terrible or fantastic time to apply for a personal loan.
Only you know if it’s an ideal time to get one and if you’re able to handle the payments. So take all our advice into consideration and you can base your decision on that. Just make sure you take the time to weigh your options and never make a rash decision.
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