Personal Loans: Top 5 Reasons People Use Them

7 October 19

Personal Loans

When personal loans are used carefully and properly, individuals can greatly increase their financial security.

Financial Emergency

Most individuals will experience financial hardship in their lifetime, and will need to rely on their credit to get them through the tough time. Personal loans serve an excellent purpose in situations such as these, as they allow individuals to make their financial obligations without placing their property under the risk of bankruptcy or foreclosure. If used within a financial emergency and promptly paid back once the situation has stabilized, personal loans are an excellent stopgap measure for when an individual’s savings have been hit due to unforeseen circumstances. This is why maintaining solid credit is so imperative.

Home Improvement

Personal loans are an excellent option when looking to finance home improvement or other personal projects. While an individual may be financially secure, they may not be able to fully finance a project on their own, or do not want to hit their savings immediately with the full expense. Personal loans help individuals pursue their goals while maintaining their credit; furthermore, a carefully maintained personal loan on an individual’s credit history demonstrates financial stability and responsibility, which can dramatically increase the credit score of some individuals. Making each payment on time and having the line of credit in good standing during the entire length of the loan can definitely boost a person’s credit rating that has previously taken hits.

Investment Opportunity

When a short-term investment opportunity presents itself, a personal loan can help the individual pursue the venture. As such, personal loans can be quickly approved without missing the opportunity. If the returns are great enough on the investment, it is in the best interest of the individual to pursue the opportunity. Typically it is not advised that such loans are used for stock trading or any other high-risk activity, as the failure of the venture can leave the individual responsible for the full principal of the loan without any physical collateral. This situation could take someone from having a good credit history and put him or her into a financial hardship in very little time, and could negatively impact the rest of that person’s financial life.

Interest Rate Difference

One of the best uses of personal loans lies in their ability to exploit differences in interest rates with other sources of credit. If an individual has a line of credit with a higher rate of interest, it is an excellent idea to pay that credit line with a different credit line that has a lower rate of interest. Depending on the loan and the duration of payments, this can save tens of thousands of dollars for the borrower. However, individuals must be careful to make sure that interest rates are fixed rather than adjustable, as this may leave the consumer with a higher loan payment than before. Make sure you compare the terms of each of the lines of credit before transferring any of the funds to ensure you are not going to end up struggling or paying more in the long run.

Big-Ticket Purchase

Personal loans are also frequently used to purchase big-ticket items such as refrigerators, televisions, or computers. These loans tend to be small in nature, and help individuals to purchase goods without draining their savings. These types of loans also help to pay for medium expenses that are too large for a credit card, but not large enough to justify a specialty loan, like a house mortgage or an auto loan.