When Are Personal Loans a Good Idea?

When Are Personal Loans a Good Idea?

February 1, 2023

Getting a personal loan can help you financially but they’re not cheap, but they’re occasionally the best option.

A personal loan can be utilized for almost any purpose. Some lenders will inquire about your plans for the money, while others will just want to ensure that you have the financial means to repay it. Personal loans aren’t cheap, but they might be a good option in a variety of situations. Here’s how to figure out which one is best for you.

Personal Loan: Eligibility And Ultimate Guide Before You Apply
Increase Your Chances of Getting Your Personal Loan
Mistakes To Avoid Before Applying for a Personal Loan
Understanding Cash Advance and Personal Loans 


When Are Personal Loans a Good Idea?


How does it work?

Some loans are designed to be used for a certain purpose. A mortgage can be used to purchase a home, an auto loan can be used to purchase a car, and a student loan can be used to pay for college. Your home serves as security for a mortgage. Similarly, the car you’re buying will serve as collateral for an auto loan.

A personal loan, on the other hand, frequently has no collateral. Because it is not secured by property that the lender can seize if you default on the loan, the lender is taking a higher risk and will most likely charge you a higher interest rate than a mortgage or auto loan. Your interest rate is determined by a variety of criteria, including your credit score and debt-to-income ratio.

In rare circumstances, secured personal loans are also accessible. Your bank account, automobile, or other property could be used as collateral. A secured personal loan may be easier to obtain and has a lower interest rate than an unsecured one. If you default on your payments, you risk losing your collateral, just like with any other secured loan.

Failure to make timely payments on an unsecured personal loan, however, might hurt your credit score and significantly limit your capacity to receive credit in the future. Your payment history, according to FICO, the firm behind the most frequently used credit score, is the single most important feature in its methodology, accounting for 35 percent of your credit score.

When Should You Get a Personal Loan?

Before you get a personal loan, see if there are any other options for borrowing that are less expensive. The following are some valid reasons:

You don’t have a low-interest credit card, and you won’t be able to get one.

Your credit card limits are insufficient to satisfy your present borrowing demands.

A personal loan is the most cost-effective way to borrow money.

You don’t have any assets to offer as security.

If you need to borrow for a relatively short and well-defined period of time, you might want to consider a personal loan. Personal loans are usually for a period of 12 to 60 months.

A two-year personal loan, for example, could be used to bridge the gap between a lump sum payment due in two years and insufficient cash flow in the meantime.

Here are five scenarios in which a personal loan might be appropriate.

Credit Card Debt Consolidation

If you have a large amount on one or more credit cards with high interest rates, you may be able to save money by taking out a personal loan to pay them off. As of this writing, the average credit card interest rate is 19.24 percent, while the average personal loan interest rate is 9.41 percent. Because of the difference, you should be able to pay off the loan sooner and pay less interest overall. Furthermore, keeping track of and paying off a single debt commitment is easier than keeping track of and paying off any debt obligations.

A personal loan, however, is not your only alternative. Instead, if you qualify, you might be able to transfer your debts to a new credit card with a lower interest rate. Some balance transfer offers even waive interest for a six-month or longer promotional period.

Other High-Interest Debts to be Paid Off

A personal loan is more expensive than certain other forms of loans, but it isn’t always the most costly. A payday loan, for example, will almost certainly have a far higher interest rate than a personal loan from a bank. Similarly, replacing an earlier personal loan with a lower interest rate than you would qualify for today could save you money. Before you do, check to see whether there is a prepayment penalty on the old loan, as well as any application or origination fees on the new one. These costs might be quite high at times.

Financing a Major Purchase or Home Improvement

Taking out a personal loan instead of financing via the seller or putting the bill on a credit card could save you money if you’re buying new appliances, installing a new furnace, or making another large purchase. If you have any equity in your house, a home equity loan or home equity line of credit may be even more affordable. Of course, since they’re both secured loans, you’ll have to put your house up as collateral.

Paying for a Life-Changing Event

Financing an expensive event, such as a bar or bat mitzvah, a large milestone anniversary party, or a wedding, may be less expensive if paid for with a personal loan rather than a credit card, as with any major purchase. As significant as these events are, you may want to consider cutting back if it means going into debt for years. Borrowing to pay for a vacation, unless it’s a once-in-a-lifetime trip, may not be a good option.

How to Improve Your Credit Score

Taking out a personal loan and repaying it on time can help you improve your credit score, especially if you’ve missed payments on other loans. If your credit report is dominated by credit card debt, a personal loan could help you improve your “credit mix.” Having a variety of loans and demonstrating that you can manage them appropriately is a bonus for your credit score.

Borrowing money you don’t need in the hopes of raising your credit score, however, is a risky undertaking. It’s preferable to keep paying all of your other payments on time while also attempting to keep your credit usage ratio low (the amount of credit you’re using at any given time compared to the amount you have available).


Personal loans might be beneficial in some situations. However, they are not inexpensive, and there are frequently better options. If you’re thinking about getting one, check your bank and see what options do they have for you.

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