A personal loan is usually an unsecured loan, which means you don’t have to post collateral. Thus, the lender will have nothing to seize in the event of default. However, we do not encourage you to default on your personal loans, as this has consequences.
One of these consequences affects your credit score. When you default on a loan, your credit score drops and reduces your chances of getting another loan approved in the future. So where can you use a personal loan? Personal loans are flexible and you can use them for a variety of reasons, such as covering an emergency fund or consolidating your loans.
Like any other type of installment loan, they are usually repaid with interest each month. But before we get into the different reasons why you should take out a personal loan, let’s talk in more detail about the type of loan.
How do personal loans work?
Different types of loans are intended for specific purchases. For example, a mortgage is for a house, car loans for cars, and student loans for educational purposes. For loans like mortgages and car loans, the new car and the house serve as the respective collateral.
Mortgages and auto loans are secured loans because they require collateral. But not all loans require collateral and such loans are called unsecured loans. Personal loans fall into this category.
A typical personal loan does not require any collateral. This means that the lender takes a significant risk in the transaction. However, the interest rate is much higher and getting approval is more complex compared to a secured loan. Approval depends on several factors such as your credit score, credit reports, and debt ratio. However, some types of personal loans are unsecured.
Since personal loans can also be used to purchase property or a car, these purchases can act as collateral in the event of default. However, in turn, the interest rate drops significantly and approval is much easier.
Whether your personal loan is secured or not, failure to pay always has the same consequences. So why take out a personal loan? Here are some reasons.
Emergency cash assistance
If you are in an emergency and need money immediately, personal loans are your solution. Most lenders today offer online applications, which makes the application process very convenient. The application process is quick, especially if you already have the documents in hand.
Approval is also quick and you can get the money the very next day or in some cases several hours later. You may need emergency financial assistance for overdue rent, funeral expenses, medical bills, or an unexpected car repair.
If you’re hesitating between getting a personal loan or a payday loan, here’s what you need to know. Payday loans are suitable for short-term cash assistance. Their deadline is usually in your next payday. However, the borrowing limit is much more limited compared to personal loans. Plus, they have incredibly high interest rates. Personal loans are a type of instant installment loan, so payments are usually made monthly or every two weeks.
One of the most common reasons people take out personal loans is to consolidate debt. But what is debt consolidation?
Debt consolidation takes all your debts and places them in one account for easy payment and a lower interest rate. This makes the deadline for all accounts uniform, and if you chose a personal loan with a low interest rate, you would pay that instead of having to remember the interest rate for each account.
Home repairs and improvements
The most common home improvement financing strategy is to take out a home equity loan. It’s the most logical decision, especially if you already have equity in your own home. This can also be done if you want to make repairs. However, did you know that you can also take out a personal loan for these reasons?
Home equity loans and line of credit loans take your home as collateral once you are unable to pay. Unsecured personal loans do not. So instead of risking losing your home for a secured loan, why not take out a personal loan? Of course, we don’t necessarily mean that it’s okay not to repay your personal loans. We say that a personal loan is much less risky than an equity loan or a line of credit.
Personal loans are quick and easy to apply for, especially if you’re in an emergency or want to buy something not too extravagant. However, remember that you must have an excellent credit score and an impeccable credit report to access personal loans, as they are unsecured. Also, your interest rate and borrowing limit depend on these factors, so keep that in mind.