There are specific kinds of loans that borrowers can avail for specific purposes. For example, mortgage loans are for buying a house, student loans are for higher education, and auto loans are for buying a motor vehicle. Personal loans are loans that can be taken for many different kinds of purposes. Most banks typically do not ask a burrower about the purpose of a personal loan.
Unlike other loans that are secured with collateral like a car or a house, personal loans are most unsecured and without collateral. Hence, the associated interest rates tend to be higher than other loans. Burrowers can offer collateral when asking for a personal loan to avail of a lower interest rate.
Listed below are some good reasons to avail a personal loan:
- You may take out a personal loan to finance some high-end purchases that are not within the budget. For example, you may take the loan to buy a top of the line laptop for your child who is going off to college. It is a better option to check the financing option with the seller and compare it with the personal loan and then select the better option.
- If you have collected a lot of credit card debt, then consolidating all that debt and paying it off with a personal loan can be a real use of the loan. Unpaid credit card bills invite runaway interest charges. After you pay it off, you only have to worry about repayment of just one debt, i.e., the personal loan.
- Personal loans can be taken to meet unexpected expenses, such as emergency medical expenses or a sudden but vital travel plan.
- You may take out a personal loan to help fund a big occasion such as a wedding. If you charge the sundry expenses of a wedding onto your credit card, then you may not be able to pay the credit card bill, in full, in the following months. This can hike up the interest charges causing you to fall into a debt trap. Instead taking a personal loan is the easier option as you can plan the monthly repayment plan.
- A personal loan can be helpful for large household expenses like replacement of a defunct appliance, remodeling the home, or home repairs that need to be done following damage in a fire, flood, etc.
- The credit bureaus calculate the credit score of borrowers on the basis of the different kinds of credit options used by the burrower. The presence of a personal loan in addition to credit cards in the credit history adds diversity, thereby helping improve the credit score. Also, personal loans raise the total amount of credit that is available for use by a borrower, which in turn reduces the credit utilization ration and enhances the credit score.
If your job does not offer adequate earnings, you may take out a personal loan and start a small business for additional income.