However, in many cases, personal loans are an ideal solution for consumers. Personal loans are often less expensive than credit cards, and funding is faster than with home equity loans or HELOCs. If you need a quick influx of cash to pay for necessary expenses, a personal loan may be a good option.
Interest rates for personal loans are usually lower than those of credit cards, especially if you have an excellent credit score. Of course, you should always weigh the benefits with the drawbacks.
Here are the top nine reasons to get a personal loan. Debt consolidation is one of the most common reasons for taking out a personal loan. This grouping of debt makes it easier to work out a time frame to pay off your balances without getting overwhelmed.
One of the best advantages of using a personal loan to pay off your credit cards is the lower interest rates. With lower rates, you can reduce the amount of interest you pay and the amount of time it takes to pay off the debt. Takeaway : Using a personal loan to pay off high-interest debt, like credit card debt, allows you to consolidate multiple payments into a single payment with a lower interest rate. If you need money for an emergency, using a personal loan instead of a payday loan may save you hundreds of dollars in interest charges.
According to the Federal Reserve Bank of St. Louis, the average APR for a payday loan is percent, while the maximum interest rate on a personal loan is typically 36 percent. Payday loans have short repayment terms, usually by your next payday, between two and four weeks.
This quick turnaround time often makes it difficult for borrowers to repay the loan by the due date. Borrowers are usually forced to renew the loan instead, causing the accrued interest to be added to the principal. This increases the total interest owed. Personal loans have longer term lengths and will generally cost the borrower much less in total interest.
Best for : Borrowers with bad credit looking to avoid high-interest predatory loans. Homeowners can use a personal loan to upgrade their home or complete necessary repairs, like fixing the plumbing or redoing the electrical wiring.
Best for : Those looking to finance a small to mid-sized home improvement project or upgrade. Personal loan funds can help you move your household belongings from one place to another, purchase new furniture, transport your vehicle across the country and cover any additional expenses. This way you can avoid raiding your savings or emergency fund. Best for : A long-distance move or those anticipating thousands of dollars in expenses.
Surprise medical bills are another common reason to take out a personal loan, especially if your doctor requires payment in full. Takeaway : Because they can be disbursed so quickly, personal loans are a good way to cover an emergency or unexpected expense. Personal loans allow you to purchase major household appliances and electronics immediately, especially if you need those appliances for regular use.
Best for : Those looking to make a bigger household purchase now to save time and money in the future. Takeaway : A personal loan can help you get new appliances as soon as you need them. A personal loan is one way to cover the cost of a car, boat, RV or even private jet.
Takeaway : Using a personal loan is better than depleting your savings or emergency funds when paying for larger expenses. Takeaway : A personal loan can help you finance all of your wedding expenses upfront, which can help you avoid dipping into your savings or emergency fund.
Your average vacation might not cost enough to necessitate taking out a personal loan, but what about a honeymoon or a luxury cruise? While a personal loan is a useful tool to finance larger or unexpected expenses, there are some situations where it may not be the best option. Before applying, consider your financial situation and the reason for taking out the loan.
The lower your credit score, the higher your interest rate could be. Looking for a place to park your cash? Brokers Top Broker Picks.
Robo Advisor and Crypto Picks. Mortgages Top Picks. Insurances Auto Insurance. Loans Top Picks. Thinking about taking out a loan? Knowledge Knowledge Section. Recent Articles. The Ascent Knowledge Credit Cards. Image source: Getty Images. When borrowing will save you money Borrowing money is smart if getting a new loan can actually save you money. When borrowing enables you to grow your net worth Purchasing a new home, starting a business, or buying an investment property could all help to improve your net worth -- under the right circumstances.
When there's an opportunity cost if you don't borrow You need to compare the cost of borrowing with the opportunity costs of not borrowing to decide if it's a smart move to take out a loan or not. Don't be afraid to borrow in every situation As you can see, going into debt definitely makes sense under the right circumstances.
Facebook Icon This icon shares the page you are on via Facebook. Blue Twitter Icon Share this website with Twitter. Email Icon Share this website with email. The Motley Fool has a disclosure policy. Featured Articles. Best Credit Cards for Compare Credit Cards Side by Side. Back to The Motley Fool. A house is a good example. Very few people can save enough money to buy a house. They borrow money from the bank to buy the house.
Every month they pay back the monthly instalment. They do this for a number of years until the loan is paid off. Their house is then an asset that they own. It is not a good idea to borrow money to buy something that you use up, such as food or clothes.
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