Personal loans can be a great option for those looking to finance a large purchase or to consolidate debt, and who are in need of funds relatively quickly. For those with a good credit rating who can afford to repay the loan, personal loans can be a good way to gain fast access to large amounts of money.
However, they are not right for everyone. Here we explore in which circumstances a personal loan might be a good idea.
What is a personal loan?
A personal loan is money borrowed for personal use from a bank, online lender or credit union. The money is paid back in fixed monthly installments over a specified period of time; the exact amount of time will vary depending on the agreement between borrower and lender but is typically between two and seven years.
Personal loans can be a good option to cover large purchases or for debt consolidation as well as emergency expenses when they appear (read more). However, the rates of your loan will depend on the borrower, their financial history and their creditworthiness.
How do you know if a personal loan is right for you?
Personal loans can be a good option for those who need fast access to funds.
Samuel Davies of Kallyss comments: “You should always be careful when applying for any loan and a personal loan is no different. These loans, like any other unsecured personal loans should only be used when you have exhausted any and all alternative options. For example, always speak to friends and family first to see if they can help in any way, to avoid needing to apply for a loan at all.”
Here are some situations in which a personal loan could be the right choice:
- If you have a strong credit score – individuals with a strong credit score will be offered the lowest interest rates, making a personal loan a cost-effective way to borrow money
- If you need quick access to funds – taking out a personal loan, especially with many online lenders, can allow very quick access to funds – often in a matter of days
- If you want to consolidate high-interest debt – if you want to consolidate and pay off your high-interest debt, personal loans are a good way to streamline your payments and avoid high interest payments
- If you want to fund necessary expenses – personal loans are a good option to pay for emergency expenses or large outgoings that you otherwise wouldn’t be able to afford such as a home renovation
However, personal loans might not be right for everyone. It must be remembered that personal loans are still a form of personal debt and should be treated accordingly. Here are some of the reasons why a personal loan might not be right for you:
- If you cannot afford the monthly payments – before taking out any loan, you must ensure that you will be able to repay the loan in full, plus the agreed amount of interest. You should never take out a loan you cannot afford to repay as this will trap you in a nasty cycle of debt
- If you typically overspend – choosing to take out a personal loan to pay off credit card debt, when you have a habit of overspending, may not be a good idea as you will likely start to build up a new credit card debt immediately after making the repayment
- If you don’t have a reason for the loan – taking out a loan to have some extra cash on hand can be tempting; however, if you do not have a specific need for the funds, it isn’t a good idea to take out a loan and have to pay interest for no reason
If you’re not in need of urgent cash – if you are not in a hurry to get cash, it makes more sense to save up to pay for a large purchase yourself, rather than taking out a personal loan which you will have to pay off over multiple years, plus interest.
