You have surely heard by now that it’s important to have an emergency fund. Maybe you do have one but it wasn’t quite enough to cover the veterinary bill, having to replace your car or a major home repair. Things like this are rarely cheap and never happen at a convenient time. That’s what makes them emergencies in the first place.
Fortunately, you can apply for a personal loan if you don’t have enough in savings to cover an untimely expense. There are even benefits to doing so beyond getting the money you need to get through an unexpected hit to your finances. It can also be a good idea to take out a new loan to consolidate existing ones, lower the interest rate you currently pay on a loan or pay for a planned expense. A lender typically doesn’t ask too many questions about what you plan to do with the funds. After all, it’s called a personal loan for a reason.
Wait! Before you apply for a credit card…
Consider getting a personal loan!
A personal loan will provide cash instead of credit and you may be able to get a better interest rate.
Find loans from $1,000-$50,000 with fixed APRs as low as 3.99%*
Taking Out a Personal Loan Can Increase Your Credit Score
A loan is a debt, and debt means you owe money. This should make your credit score go down, right? Not necessarily, according to a May 2017 article in Forbes Magazine. The amount of credit you have available to you and the percentage of it that you use is known as credit utilization. This makes up 30 percent of your credit score, second only to your payment history at 35 percent. It’s one of five factors that make up your total score.
With credit cards, the temptation is always there to charge up to your limit. It’s a revolving account with no specific ending date that you can use over and over. One of the many personal loan benefits is that you receive a lump sum that you make fixed payments every month. That means your credit score can go up as your balance goes down. Additionally, replacing credit card debt with a personal loan or opting for a loan in the first place diversifies your credit portfolio. This is something lenders like to see when considering whether to approve your request for credit.
Lower Interest Rates for Planned Expenses
A sudden financial need isn’t the only reason to consider applying for a personal loan. For example, maybe your family is growing out of your current home. Rather than put your house up for sale and search for a new one, a home improvement loan can help you add more space and stay put. You have planned the upgrade for the past couple of years and now you need to borrow money to follow through with it.
However, there’s no rule that says you can only take out a loan for typical life expenses such as moving, medical care, or higher education. You can have fun with it as well. In fact, paying for a wedding, honeymoon, or going on a dream vacation is among the top 10 reasons that prompt people to apply for a personal loan. Just don’t go overboard and get yourself into so much debt that you’re still paying for this summer’s vacation 10 years from now.
Regardless of your reason for needing outside financing, one of the most important personal loan benefits to consider is the lower rate of interest for planned expenses. Unlike credit card interest that can run as high as 30 percent, most lenders offer interest rates in the single digits for personal loans.
Refinance High-Interest Debt
When you refinance a debt, it means that you renegotiate the original payment and interest terms with the lender. Home mortgages are one of the most common types of debt that people choose to refinance. Interest rates may have dropped since they originally took out the loan, and they now want to refinance at the lower rate. Refinancing any type of loan can potentially save you thousands of dollars in interest over the life of the loan.
If you opt to go the refinancing route, keep in mind that you may end up paying more if your lender agrees to extend the due date. It’s important to consider several scenarios carefully and select the one that will save you money now and in the future. Lenders will often contact borrowers with refinancing opportunities. If not, don’t be afraid to approach your lender to ask if refinancing is a possibility for you.
Consolidate Debt
Managing multiple debts can get complicated and time-consuming, not to mention expensive from paying so many different interest rates. Consolidating debt allows you to enjoy the personal loan benefits of making a single payment, typically at a lower interest rate. A second mortgage, also known as a home equity loan, provides you with a large lump sum of cash that you can use to pay off your other debts. However, you need to consider the loan is tied to the value of your home. That means the lender can seize your property if you can’t keep up with the payments.
An unsecured debt consolidation loan usually comes with a higher interest rate. The trade-off is that you apply for the personal loan separately from your mortgage. If you find that you have difficulty keeping up with your payments later, you can always approach your lender about refinancing without the worry of losing your home.
Set a Pay-Off Date for Debts
When it comes to personal loan benefits, installment loans offer one benefit you will never find with revolving charge accounts. It has a set end date so you don’t feel like you’re paying forever and getting nowhere with lowering your debt. This will give you an incredible feeling of accomplishment when you send the final payment, especially if you make extra payments and terminate your loan early. Of course, this is only possible if you don’t open other loan or credit cards at the same time or continually charge to the limit on the credit cards you already have.
Borrow Money without Risking Your Assets
Being approved for an unsecured personal loan means that you don’t need to pledge any type of collateral to receive the funds. Collateral is the term used to describe a piece of personal property such as your home, car, or investment account. It will be a big relief to receive the money you need for an emergency or planned expenses without the threat of losing a valuable asset hanging over your head.
Banks and credit unions are the best places to start when searching for an unsecured personal loan. Keep finance companies as a last resort since interest rates tend to be significantly higher than they are with traditional lenders.
Lisa Kroulik is a freelance content marketing writer with eight years of experience. She has a special interest in helping readers make sound financial decisions and financial recovery topics. After having filed bankruptcy in 2008, Lisa took the opportunity to make a fresh start and learn from her mistakes. Today she has a credit score of 830 and no debt other than a mortgage.
