Why Would I Need a Personal Loan?

Alternative to Payday Loan · 3.Founded in 1976, Bankrate has a long history of helping people make smart financial decisions. We have maintained this reputation for more than four decades by demystifying the financial decision-making process and giving people confidence in the following actions.

Personal loans

are borrowed money that can be used for large purchases, debt consolidation, emergency expenses and much more. These loans are repaid in monthly installments over the course of a few months or more than a few years.

It may take longer depending on your circumstances and the diligence with which you make payments. After you are approved for a personal loan, the funds you receive will be deposited into your bank account in a lump sum. The transfer can take as little as 24 hours or a few weeks, depending on the lender. You will need to start making monthly payments as soon as the loan is disbursed. Debt consolidation is one of the most popular reasons why people apply for a personal loan.

When you apply for a loan and use it to pay off multiple loans or credit cards, you're combining all of those outstanding balances into one monthly payment. This pooling of debts makes it easier to set a time frame for paying your balances without feeling overwhelmed. If you need money for an emergency, using a personal loan instead of a payday loan can save you hundreds of dollars in interest charges. According to the Federal Reserve Bank of St. Louis, the average APR for a payday loan is 39.1 percent, while the maximum interest rate on a personal loan is typically 36 percent.

Personal loan funds can help you move your household belongings from one place to another, buy new furniture, transport your vehicle across the country, and cover any additional expenses. Using a personal loan for moving expenses can also help you stay afloat if you move somewhere without work. This way, you can avoid looting your savings or emergency fund. A personal loan can be used as a form of debt consolidation, especially with credit card debt. It's also a popular reason people apply for a personal loan.

Personal loans charge lower interest rates compared to credit cards, especially if you have good credit. The best personal loans charge an interest rate as low as 4%, well below the double-digit percentages that most credit cards charge. You can apply for a personal loan, pay off your outstanding credit card balance, and then make a payment to your new personal loan servicer. If you move close to where you live now, you may not need to cover any major expenses. But if you're moving out of state, you may need extra money to pay for moving costs. Moving far away means covering the cost of packing your belongings, possibly hiring removals and transporting your things to your new location.

Even with an unsecured personal loan, of course, not making payments on time can be detrimental to your credit rating and severely limit your ability to get credit in the future. FICO, the company behind the most widely used credit score, says its payment history is the most important factor in its formula, accounting for 35% of its credit score. You can also consider a personal loan if you need to take out a loan for a fairly short and well-defined period of time. Personal loans usually last 12 to 60 months. For example, if you are owed a lump sum of money in two years but in the meantime don't have enough cash flow, a two-year personal loan could be a way to close that gap. If you owe a substantial balance on one or more high-interest credit cards, taking out a personal loan to pay them off could save you money.

For example, as of this writing, the average interest rate on a credit card is 19.49%, while the average rate on a personal loan is 9.41%. That difference should allow you to pay the balance faster and pay less interest in total. In addition, it is easier to track a single debt obligation and pay it off rather than several. If you have multiple high-interest rate loans, it can be difficult to repay them when a large portion of your payment goes to interest. Consolidating debts through the use of a personal loan allows you to convert them into one single debt. This combination of debts gives you only one payment to manage each month rather than several.

And ideally, you also get a lower interest rate which can save you money. A personal loan could also be useful if you want to buy a car. Similar to consolidating debt, you will receive the proceeds from the loan and then write a check from your bank account to cover the cost of the vehicle. In addition to cars, you can also use a personal loan to purchase boats, motorcycles, trailers or recreational vehicles. Once you find a lender you like, you will submit an application with your loan details, your personal information and income verification documents. Unlike home-equity products, personal loans often don't require using your home as collateral as they are not secured. One of the benefits of getting a personal loan is that they're usually unsecured meaning they aren't backed by assets like your house or car.

To determine if you qualify for a personal loan, lenders will check your credit and income and assess your ability to repay the loan. Ultimately, it's up to you whether taking out major purchases justifies getting a personal loan or if it's better to look at other options such as waiting one year before taking that dream vacation and saving money in the meantime. If there isn't enough money on hand then taking out a personal loan may be necessary in order to cover moving expenses. There are also situations where getting a personal loan will be the best option.

Tonia Baldy
Tonia Baldy

Passionate entrepreneur. Freelance pop culture enthusiast. Award-winning pop culture advocate. Music expert. Friendly beer fan.