5 Smart Reasons to Use a Personal Loan
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Going into debt is never ideal, but there are times when taking a small personal loan might help you improve your financial situation. Hint: Upgrading your vacation plans or purchasing a luxury car probably aren’t among the best reasons.
But if gaining access to cash would help you move forward with a particular goal and save you money or stress, a personal loan can be worth considering.
“The primary reason why someone is going to want to take out a personal loan is because they have liquidity issues,” said Michael Gerstman, a financial advisor at Gerstman Financial Group in Dallas.
Most personal loans are fairly easy to secure, he noted, assuming you can verify your employment and income, as well as meet other lender requirements.
5 ways you can use a personal loan to turn around your finances
Take a look at some situations for which a personal loan can be a smart solution.
Pay off high-interest credit card debt
If you’re having trouble making a dent in one or more large credit card balances because the interest is so high, a personal loan might help you speed up your progress. That’s because most credit interest rates are double digits — the latest Federal Reserve data shows that the average APR for all credit card accounts was 14.73% in November 2018 — while you can expect to get a much more competitive rate on a personal loan, Gerstman said.
“A personal loan is a great vehicle for helping someone get their debt house in order,” he said.
But there’s a catch. Unfortunately, some people will take out a loan with the best intentions of getting out of debt, but then end up using their cards again. So not only will their credit card bills grow, but this time there’s a personal loan payment, too.
As long as you are confident that you won’t put yourself in a cycle of debt, a personal loan can be a wise way to consolidate and tackle credit card balances for good.
Repair or replace something in your home
Whether it’s your central air conditioning unit or the siding on your house, sometimes things need to be replaced in your home. If taking out a home equity loan or home equity line of credit isn’t an option for you, you might consider a personal loan to help cover the costs.
The question you have to ask yourself is if your home repair is something you have to do or something you want to do, Gerstman said.
If you’re taking out a loan to install granite countertops in your kitchen, that may not be a great use of a personal loan. But if you need cash to repair a leaky roof before it causes further damage, a personal loan can actually save you money and heartache.
Improve your credit score
Yes, borrowing money via a personal loan can give your credit score a boost in certain situations.
Here’s why: One of the components used to calculate your FICO Score is your credit mix, which refers to the different types of credit that you have, from credit cards to installment loans to home loans and more. Your score is more favorable if you can handle a mix of credit types responsibly. It accounts for 10% of your score.
Although it’s not the most important factor, if you don’t have a long and varied credit history, a personal loan can help strengthen your credit mix and showcase your creditworthiness.
“However, it is crucial to make your payments on time and handle the loan responsibly if your objective is to raise your credit score,” Gerstman said.
Support a side hustle
If you’re trying out a new gig to generate some income, you might need to invest in supplies, equipment or training. If you don’t want to go the business loan route just yet, a personal loan can be the next best thing to help you with cash flow.
“Once again, you’ve got to be prudent in the use of the money,” Gerstman said. If the venture doesn’t work to your expectations, you will still have the loan. But, of course, a small element of risk is to be expected when you’re trying to get a small business off the ground. “That’s entrepreneurship,” he said.
Cover health expenses
Even with health insurance, sometimes the out-of-pocket costs of medical visits deter people from getting preventive care or testing that they probably shouldn’t put off. If you’re in this situation, a personal loan could help.
But just as with the home repair example, remember to differentiate between a health expense that’s needed versus one that’s wanted, Gerstman said.
For instance, having crown and bridge work done on your teeth might be more of a necessity than going for whitening treatments. Likewise, early cancer screenings not covered by health insurance would be a higher priority than most cosmetic surgeries.
How to be smart when getting a personal loan
Anytime you make a financial decision involving borrowing, it pays to shop around, Gerstman said. Some of the things to look at include the length of the loan, the interest rate, fees and the qualifications for approval.
Gerstman suggests seeing what your personal bank has to offer. “Chances are, if you already have a relationship with a bank or credit union, they are more likely to give you more favorable terms than someone walking in off the street,” he said.
From there, it’s always smart to compare loan offers before making a final decision. LendingTree can help you explore options from lenders based on your personal criteria.
If you have a good reason to take out a loan, can secure a favorable rate and terms, and have a well-thought-out strategy for paying it back, a personal loan may be right for you.